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What is Market Manipulation?
Market manipulation can take place in a variety of forms and cases of market manipulation can vary in complexity; but ultimately it occurs when an investor:
Ultimately the manipulator here is trying to deceive other investors and the market, in order to make a personal benefit. Oftentimes this also means that other unknowing investors will make a loss due to this deception.
FCA Handbook - MAR 1.6.
Who do market manipulation rules apply to?
Everyone who invests needs to be aware of the rules around market manipulation.
If you attempt to artificially inflate or deflate the price of a stock, or provide false statements regarding a stock, then you are participating in market manipulation.
Examples of Market Manipulation
Below are some examples of Market Manipulation. Though be aware that this is just for example purposes and many other examples of Market Manipulation lie outside the scope of the below:
Pump and dump: A Scheme by Social Media Influencers
A pump and dump scheme takes place when an individual or group of people purchase a stock, usually at a low price, and then proceed to make false and misleading statements regarding this stock, in the hope that other investors will buy into the scheme.
If the individual or group is able to convince the other investors to purchase the stock they will likely see a price spike (pump) due to the increased volume and demand for this seemingly well performing stock. As the price rises the manipulators sell (dump) their positions and the price begins to drop, leaving the manipulators with a profit and the unsuspecting investors likely left in a losing position.
In 2022, the SEC charged seven social media influencers, who claimed to be successful traders, with taking advantage of their hundreds of thousands of their social media followers and feeding them false information. The SEC notes that these individuals were able to obtain up to $100 million dollars through a pump and dumb scheme.
FCA Handbook - MAR 1.6.
SEC Charges Eight Social Media Influencers in $100 Million Stock Manipulation Scheme Promoted on Discord and Twitter
Ramping
Ramping involves an investor entering orders to trade or executing transactions which start a trend that increases or decreases the share price. The manipulator trades, and/or encourages others to trade until the share price hits a favourable level for them to exit or open a position.
This behaviour can often occur in stocks that have low liquidity and are therefore more susceptible to rapid price changes. The low liquidity level can also be a hindrance to manipulators who may find it difficult to find a buyer / seller to execute trades at the favourable price and quantity.
In 2011 the FCA (FSA at the time), fined Samuel Nathan Kahn, a stock market trader, £1.09m for ramping. In order to conduct the scheme, Kahn bought large amounts of stock in GBL. Kahn then “repeatedly impersonated other people when placing orders to trade in GBL's shares” which allowed him to “double the GBL share price within four weeks.”
FSA Final Notice
FSA gives rogue trader £1.09m fine for share ramping
What are the consequences of Market Manipulation?
The FCA states that for breaches of UK market abuse regulations they can “impose unlimited fines, order injunctions, or prohibit regulated firms or approved persons.
Criminal sanctions for insider dealing and market manipulation can incur custodial sentences of up to 10 years and unlimited fines.”
FCA Market Abuse
Further Information
We have created a new Fraud and Security Centre. Here you’ll find a series of articles and tips on how to stay safe that we will keep adding to over time. Please take a look and contact us if you have any questions.
If you would like to learn about Insider trading you can find an article regarding this here.
You can also check out our previous article about AIM’s £100m pump and dump fraud here
The views expressed above are those of community members and do not reflect the views of Freetrade. It is not investment advice and we always encourage you to do your own research.