Understanding Market Manipulation: Deception in the Financial World
Financial market manipulation is an intentional act of misleading or deceiving investors by controlling or artificially affecting the price of securities. While illegal in most cases, it poses significant challenges for regulators and market authorities to detect and prove given its often covert nature.
Market manipulation can either involve falsified information or gain through controlling market movements, all aimed at misleading other participants.
Essential Insights
- The primary goal of market manipulation is to mislead market participants and control prices for arbitrage profits.
- Detecting and proving manipulation is strenuous, though executing it in larger and highly liquid markets like blue-chip stocks is more complex than in smaller, lesser-traded markets such as penny stocks.
- Common stock manipulation schemes include the infamous pump-and-dump and poop-and-scoop strategies.
- Currency manipulation serves a different, often politically driven purpose, underpinning trade disputes between countries.
Strategies Utilized in Market Manipulation
Manipulating widely traded and highly liquid securities is considerably more demanding compared to manipulating smaller, less active stocks. Hence penny stocks are more susceptible to such nefarious activities than large-cap companies with significantly higher trading volumes.
Pump-and-Dump Scheme
The pump-and-dump strategy involves artificially inflating the price of a microcap stock through misleading statements and over-hyped promotions to attract investor interest. Subsequently, manipulators sell off their positions at the inflated prices, leaving naive investors with worthless stocks.
Poop-and-Scoop Strategy
Conversely, the poop-and-scoop method involves spreading false negative information about a stock to drive its price down artificially. Manipulators then purchase the devalued stocks only for accurate information to surface later, restoring the stock’s value and securing the manipulators’ profits.
Short-and-Distort Tactic
The short-and-distort strategy is analogous to the poop-and-scoop method but is executed by short-sellers intending to profit by lowering the stock’s prices through misleading information.
Order Spoofing
Another manipulative tactic is order spoofing, where numerous fake buy or sell orders are placed to influence the stock price. The counterfeit orders are canceled once other traders move their positions in reaction, thus benefiting the spoofers from temporary market movements manipulated to illusionary buying or selling pressure.
The Complexities of Currency Manipulation
Currency manipulation comes forth as a rife topic in the arena of trade and foreign exchange disputes often accused of currency depreciation. This control seeks an advantage in exports by devaluating a currency against the U.S. Dollar to compel competitive commodities pricing favorably.
Political vs Economic Realm
Understanding currency manipulation as an actionable wrongdoing diverges into political discourse compared to an illegal market practice, heightened prominently during trade imbalances and confrontations.
The evaluative landscape stands subjective with implications factoring foreign policy measures like those reported twice a year by the U.S. Treasury as mandated for scrutiny of macroeconomic policies.
Notable Example of Currency Manipulation
A vivid incident transpired on August 5, 2019, when the People’s Bank of China depreciated the yuan’s daily reference rate over 7 yuan per dollar. Triggered by the Trump administration’s 10% tariff imposition, alleging manipulation intended to keep Chinese exports highly competitive in dollar value worldwide.
Subsequently, though China faced quick claims of currency manipulation, the specifics tied to these events delineate both complex political maneuvering and economic strategies implicated frequently in matters of international trade rectitudes evidenced through lasting tariffs on Chinese goods.
Related Terms: securities fraud, investors protection, stock trading strategy, foreign exchange policies.
References
- U.S. Securities and Exchange Commission. “Market Manipulations and Case Studies”, Page 4.
- Nasdaq. “5 Market Manipulation Tactics and How to Avoid Them”.
- U.S. Securities and Exchange Commission. “SEC Charges California Day Trader for Manipulative Trading”.
- U.S. Securities and Exchange Commission. “J.P. Morgan Securities Admits to Manipulative Trading in U.S. Treasuries”.
- Congressional Research Service. “Exchange Rates and Currency Manipulation”.
- AP. “IMF Contradicts Trump: China Hasn’t Manipulated Its Currency”.
- Project Syndicate. “The Currency Manipulation Game”.
- U.S. Treasury. “Treasury Releases Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States”.
- BBC. “Trump Escalates Trade War With More China Tariffs”.
- U.S. Treasury. “Treasury Designates China as a Currency Manipulator”,
- The New York Times. “U.S. Says China Is No Longer a Currency Manipulator”.
- CNN. “Why Biden Is Keeping Trump’s China Tariffs in Place”.
