What is Manipulation in the Stock Market?

Last Updated: 17 Jan 2025

The idea behind investing in the stock market is simple: you buy shares at a lower price and sell them at a higher price. However, numerous entities in the stock market are capable of manipulation in the stock market. These entities deceive the uninformed investors and use their investment to increase or decrease the price of securities. The process is called market manipulation. For an investor, it is vital to understand the topic in detail to ensure utmost investment protection.

What is Manipulation?

Stock market manipulation is conduct or technique used by stock market entities to fool the investors by artificially affecting the prices of securities. These entities undertake various measures to falsely increase or decrease the demand for the securities to represent them as a profitable investment even when they know securities to be fundamentally flawed. Almost all the entities indulge in market manipulation for personal gains and exit their positions when their predetermined goals are achieved.

For market regulators such as the Securities and Exchange Board of India, detecting market manipulation is difficult. As numerous other factors affect the price of the securities, all the factors are impossible to quantify, leading to a gap in identifying market manipulation. However, in the case market manipulation is detected by SEBI, the entities can face serious civil liabilities such as a securities market ban, jail term or a heavy fine.

How does Market Manipulation work?

When trading or investing in the stock market, it all comes down to the price of the security. Entities included in market manipulation try to artificially affect the demand or supply of the security such that investors with less knowledge find the security as a viable investment.

For example, market manipulators would want the price of a share to increase if they have put a considerably large amount of orders at the current market price. To ensure that other investors perceive the share as interesting, market manipulators execute an equal number of buy and sell orders with different brokers. The equal amount of orders cancel each other out but result in increasing the trading volume. Investors with less knowledge take it as a sign of increased interest and invest, further contributing to higher demand. Once the share price increases, market manipulators dump their shares, which results in the crashing of the share price.

Furthermore, market manipulation also works with the market manipulators trying to lower the price of a security by placing a large number of small orders at a price lower than the security’s current market price. Once other investors see numerous orders at a lower price, they perceive overall sentiment as unfavourable and think that there is something wrong with the company. As it indicates that the share price may decrease, they sell their shares to cut losses, which lowers the security’s market price.

Example of Market Manipulation

In 2019, the Securities and Exchange Board of India barred 12 entities for 4 years from trading in the securities market as they were found guilty of manipulating the share price of Ram Minerals and Chemicals Ltd.

According to SEBI, the entities executed a large number of trades to match the price of the prevailing buy orders. The buy orders were placed at a price higher than the previous traded price. Therefore, the manipulated orders increased the company’s share price and resulted in misleading the investors. During the period of examination from December 2013 to December 2014, SEBI realised that the share price of Ram Minerals and Chemicals Ltd rose from Rs 2.20 per share to Rs 219.55.

The probe by SEBI revealed that the 12 entities were connected and in constant discussions with each other and planned to manipulate the share price by placing the artificial orders together. Although numerous buy orders were available, the entities sold a very small quantity of shares and performed only one transaction a day.

Stock Market Manipulation Method

There are numerous ways market manipulators use market manipulation. Some of the most common ones are as follows:

• Wash Trading: In this type of market manipulation method, entities pick a single stock to sell and repurchase repeatedly to generate increased trading activity. The repeated buying and selling increase the trading volume and attract investors by letting them think that the share price will increase. Once the investors buy the shares, the share price increases.
• Brokers and Pledged Shares: It is common industry practice for promoters to pledge their holding to raise loans. Market manipulators influence the market to reduce the share price, resulting in decreasing the total price of pledged shares. With the shares losing their value, promoters are forced to make up for lost collateral. Since it is an indication that the lender may dumb the shares if the margin is not met, the investors start to dump shares in a panic, further lowering the share price.
• Pump and Dump: Pump and Dump is one of the most common market manipulation methods. Manipulators buy shares in huge numbers and then spread false news to represent them as positive announcements. The shares are represented as the next best thing or multi-baggers to ensure that the uninformed investors find the shares undervalued.The investors invest thinking that the shares will increase in their price, which results in increasing the demand and, thus, the share price. Once the share price increases, the manipulators dump their shares in a single transaction. It crashes the share price to go to its true value, forcing investors to incur massive losses.

• Short and Distort: In this type of market manipulation, the bears (who make profits by short selling) target a stock that has been increasing its price steadily. They take short positions in the stock to increase the share price artificially and follow it by spreading negative news about the company. This creates an unfavourable perspective for investors who dump the shares to cut their losses. It rapidly decreases the share price, allowing the short-selling manipulators to make huge profits.
• Spoofing: This market manipulation technique occurs when the manipulators place a large number of orders in the market without any intention of buying the shares. Uninformed investors take it as a sign that a prominent trader is waiting to buy a large number of stocks which will eventually increase the share price. The investors invest in the stock and increase the volume. At this time, the manipulators pull the orders back, and the investors are forced to dump the stocks, lowering the share price to a level where the manipulators are comfortable buying.

How to prevent market manipulation

Market manipulation is a significant problem that compromises the integrity and fairness of financial markets. Deliberate activities are taken to bias the assets’ natural price movement, giving those who engage in such tactics an unfair advantage. The following actions can effectively stop market manipulation:

1.Robust Regulation and Monitoring

Regulatory agencies like the SEC and FCA ought to enforce stringent laws and conduct ongoing market monitoring. This helps to preserve market integrity by ensuring that questionable activity, such as insider trading or price manipulation, is identified early.

2.Education for Traders and Investors

It is essential to inform market players about the dangers and telltale symptoms of manipulation. The likelihood of market abuse can be decreased by increasing traders’ and investors’ awareness of how manipulative tactics, including “pump and dump” and “spoofing,” take place so they can more easily spot and report them.

3.Cutting Edge Technology and Real-time Monitoring

Real-time trading activity monitoring can be greatly improved by utilising advanced technologies like artificial intelligence (AI) and machine learning. These technologies have the ability to identify anomalous patterns, such as sharp price swings or sudden volume increases, which prompted authorities to look into and take action right away.

4.Serious Repercussions for Manipulators

Those found engaging in market manipulation face severe and unambiguous sanctions, which serve as a deterrence. The message that manipulation has serious repercussions can be reinforced by fines, trading prohibitions, and even criminal prosecution, which can dissuade illegal activity and keep the deterrent effect going.

5.Keeping Market Practices Transparent

In order to stop market manipulation, transparency is essential. Order books, pricing information, and transaction data that are easily readable enable regulators and investors to confirm the fairness of deals and identify any anomalies. It is more difficult for manipulators to act undetected when actions are transparent.

6.Promoting Equitable Market Competition

Encouraging equitable competition in the market guarantees that no one party can control the market or manipulate prices for their benefit. Maintaining a level playing field and lowering the likelihood of manipulation is made possible by providing all participants with equal access to information and opportunities.

7.Global Collaboration Between Regulators

International collaboration among regulators is essential because market manipulation can happen across national borders. Regulatory agencies can stop criminals from taking advantage of variations in national laws and guarantee responsibility globally by exchanging information and coordinating enforcement actions.

Financial markets can lower the danger of manipulation and maintain efficient, transparent, and fair trade by implementing these safeguards.

Final Word

Stock market manipulation is illegal, and the entities are charged with civil lawsuits and bans. However, as they are difficult to detect, it is important for every investor to not fall for such market manipulation techniques. With the knowledge of what market manipulation is, you can better analyse your trades and ensure that you are not being manipulated by market manipulators. The best way is to spend time learning about the stock market factors and not base your investments on external calls.

Frequently Asked Questions

Is market manipulation illegal?

Indeed, it is unlawful to manipulate the market. It compromises market integrity by purposefully manipulating the market to give an unfair advantage. To ensure fair trading activities, regulatory agencies like the SEC enforce stringent prohibitions prohibiting manipulation.

What are the consequences of market manipulation?

Manipulation of the market has dire repercussions. Offenders may be subject to hefty fines, trade suspension, and criminal prosecution. Protecting investors, discouraging fraudulent activity, and preserving faith in the financial markets are the objectives.

How do you identify market manipulation?

Unusual trading patterns that include abrupt, inexplicable price spikes, erratic order placements (such as spoofing), or coordinated buying and selling to artificially inflate or deflate asset values are indicators of market manipulation. These activities should be looked into because they differ from typical market behaviour.

Who regulates market manipulation?

The UK’s Financial Conduct Authority (FCA), the U.S. Securities and Exchange Commission (SEC), and other national regulators are among the financial authorities that oversee market manipulation. These organisations keep an eye on markets and enforce the law to stop manipulative tactics.

What is the offence of market manipulation?

Market manipulation is the deliberate deception or influence of the market by people or organisations to manipulate asset values. This might involve strategies such as disseminating misleading information or making trades to deceive other investors, and it is illegal under financial law.