8.3 Market Manipulation Techniques and Prevention

Market manipulation techniques can distort prices and undermine fair trading. Spoofing, layering, and wash trading create false impressions of supply and demand. Price manipulation strategies like marking the close and cornering the market artificially influence prices for personal gain.

Preventing market manipulation requires vigilant monitoring and enforcement. Regulators and exchanges use sophisticated surveillance to detect suspicious activity. Strict regulations and penalties deter manipulative practices, while firms must implement robust compliance programs to maintain market integrity.

Manipulative Trading Practices

Deceptive Order Placement Techniques

Top images from around the web for Deceptive Order Placement Techniques

• 

  Putting It Together: Ethics in Business | Principles of Management View original

  Is this image relevant?

• 

  Ethics and Accounting | Accounting for Managers View original

  Is this image relevant?

• 

  Putting It Together: Ethics in Business | Principles of Management View original

  Is this image relevant?

• 

  Ethics and Accounting | Accounting for Managers View original

  Is this image relevant?

1 of 2

Top images from around the web for Deceptive Order Placement Techniques

• 

  Putting It Together: Ethics in Business | Principles of Management View original

  Is this image relevant?

• 

  Ethics and Accounting | Accounting for Managers View original

  Is this image relevant?

• 

  Putting It Together: Ethics in Business | Principles of Management View original

  Is this image relevant?

• 

  Ethics and Accounting | Accounting for Managers View original

  Is this image relevant?

1 of 2

• Spoofing involves placing orders with no intention of executing them to create a false impression of market demand or supply and manipulate prices
• Layering consists of placing multiple orders at different price levels on one side of the order book to create a misleading impression of market depth and liquidity (bid or ask side)
• Wash trading refers to simultaneously buying and selling the same security to create artificial trading volume and misleading market activity without any change in beneficial ownership
  • Often involves trades between accounts owned by the same entity or colluding parties
  • Can be used to manipulate prices, generate commissions, or meet volume requirements

Price Manipulation Strategies

• Marking the close is a practice of aggressively buying or selling securities near the close of trading to artificially influence the closing price
  • Commonly used to impact the valuation of positions or benchmarks tied to closing prices (mutual funds, derivatives)
• Cornering the market involves acquiring a dominant position in a security to manipulate its price by controlling the available supply
  • Allows the manipulator to dictate prices and extract profits from other market participants
  • Historically associated with commodities markets but can occur in other asset classes (silver market, Hunt brothers)

Prevention and Enforcement

Monitoring and Surveillance Measures

• Market surveillance involves monitoring trading activity to detect and investigate potential manipulative practices
  • Employs sophisticated algorithms and data analysis to identify suspicious trading patterns (unusual volume, repetitive orders)
  • Conducted by exchanges, regulators, and market participants to maintain market integrity
• Best practices for prevention include implementing robust compliance programs, training employees on prohibited practices, and establishing clear policies and procedures
  • Firms should have controls in place to monitor and flag potentially manipulative trades (risk limits, trade review)
  • Promoting a culture of ethical conduct and accountability is crucial in deterring manipulative behavior

Regulatory Framework and Enforcement Actions

• Regulatory enforcement involves investigating and prosecuting manipulative trading practices to hold violators accountable
  • Regulators (SEC, CFTC) have broad authority to subpoena records, freeze assets, and impose penalties
  • Enforcement actions can result in fines, disgorgement of profits, trading bans, and criminal charges in severe cases
• Key regulations prohibiting market manipulation include Section 9(a)(2) of the Securities Exchange Act, Rule 10b-5, and the Commodity Exchange Act
  • These laws provide the legal framework for combating manipulative practices and protecting market integrity
  • Regulators often coordinate with exchanges and market participants to gather evidence and build cases against manipulators