What is Manipulation? | Kotak Securities (2024)

Key Highlights

• Market manipulation is the intentional and artificial manipulation of supply and demand to influence a stock's price.
• Manipulators benefit when other investors buy or sell securities whose price has been manipulated.
• Rumours and fake transactions are used to manipulate the price of securities.
• A number of scams can deceive regular investors. So, they frequently don’t get their money back.

Definition of Stock Market Manipulation

Stock market manipulation is the attempt to mislead investors by manipulating the supply and demand of an asset to raise or lower its price artificially. Those who manipulate prices to benefit from the change in prices. Manipulation in the stock market isn't always easy to detect.

Identifying market manipulation is challenging for authorities like the Securities and Exchange Board of India (SEBI). There is a gap in the ability to identify market manipulation since too many other elements influence the price of the assets. This makes it hard to measure them. However, if SEBI finds evidence of market manipulation, the involved parties may be penalised. There can be a ban from the securities market, jail, or hefty fines.

How does Market Manipulation Work?

The stock market may be manipulated in a number of ways. One can place a number of tiny orders at a price less than the market price. This can deflate the price of the asset. Investors interpret it as an indication of a problem with the stock. When investors sell their stocks due to an unfavourable outlook, the stock price falls even more.

Others can place an equal number of simultaneous buy and sell orders for the same asset through various brokers to raise the price of a security. As a result, the orders shall cancel out each other. An investor may think of it as a genuine interest in the asset due to the high amount of completed orders. They purchase that security as they believe there may be future price growth. This leads to an increase in the stock price.

Examples of Market Manipulation

Let’s look at some real-life examples of manipulation in the stock market.

• The Satyam Computer Services scam: An Indian IT firm called Satyam Computer Services overstated its profits by ₹7,800 crore (about US$1 billion) in 2009. A new chairman was hired after the company's founder - Ramalinga Raju. He confessed to the crime.

• The Unitech scam: A primary Indian real estate developer named Unitech Group was accused in 2015 of transferring money to shell companies. Ultimately, the promoters of Unitech were barred by SEBI from the securities market for a decade.

Methods of Market Manipulation

The following are some popular ways of stock manipulation.

1. Spoofing: It refers to the practice of placing fake orders and then cancelling them before they are carried out. Investors look at the pending buy and sell orders to determine if the market is bullish or bearish on a stock. Therefore, spoofing might give these investors the impression that there is a lot of interest in the market. However, in reality, there isn't. The fake orders convince actual buyers or sellers to act in a particular way. Thus, the spoofer profits.

2. Wash Trades: They are offset transactions done to deceive the market rather than to goal buy or sell shares. The same trader may engage in two separate broker wash trades. Further, a trader and broker may work together to make a wash trade. Offsetting deals in the derivatives markets may also be a part of it. It is intended for fake trades to imply activity on one side of a market. However, there is no real activity.

3. Pump and Dumps: In this case, the manipulator builds up a position in the company's shares. Then, he makes positive remarks about it to attract investors who will raise the price even more. To make profits, the manipulator then sells the stock. Pump and dump methods are generally used for small-cap or microcap stocks, where there is more potential for manipulating the stock price. False news is used to attract retail investors, who are more vulnerable.

4. Painting the Tape: The phrase "painting the tape" refers to the time when ticker tape was used to print stock trades. It attempts to give the impression that there is a lot of activity on one side of the market. The manipulator has a partner who makes the countertrades somewhere else. When it happens at the close of a trading day, it is also known as "marking the close."

5. Bear Raids: A "bear raid" occurs when a manipulator initiates a short position in a company and then makes critical remarks about it. It is also known as a "short attack" or "stock bashing". This strategy aims to make investors sell their shares in a panic, which lowers the stock's price. Even if the manipulator gave false information, the goal is still to close their short positions at cheaper prices and make a profit.

Conclusion

Market manipulation occurs when someone tampers with the standard stock trading process for personal benefit. There are many ways to do it. Spoofing, stock bashing, pump and dump are some popular methods. Planned manipulation of stock prices is prohibited. However, it exists in the markets and may take various forms. Manipulative strategies often have a short lifespan. They aim to benefit from the impatience of investors. You should understand the ways of manipulation. Be aware of its signs to protect yourself as an investor.