What Is Market Manipulation?
Market manipulation is a federal crime that involves artificially influencing the price of a security or interfering with financial markets for profit. Market manipulators can be anyone from individual investors to hedge funds that use deceptive trading strategies to profit from these artificial price movements, often at the expense of ordinary investors. In the United States, the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) aggressively pursue these cases. Understanding how market manipulation works is critical for anyone trading on the stock market or working in the securities industry.
Common Types of Market Manipulation
While the term “market manipulation” covers a wide array of schemes, most of them fall into a few broad categories:
Pump and Dump Schemes
In a “pump and dump” scheme, insiders or promoters “pump up” a stock by artificially inflating its price through aggressive marketing, fraudulent press releases, or coordinated buying. Once the stock price has risen sharply, they “dump” their shares by selling at the inflated price, leaving unsuspecting investors holding the bag as the price collapses.
Spoofing
Spoofing involves placing fake buy or sell orders to create a false sense of market demand. Spoofers place large orders on one side of the market, with no intention of executing them, to trick other traders into reacting. Once the market moves in the desired direction, the spoofer cancels the fake orders and profits from the artificial movement.
