What is market Manipulation?

By: R.M.B Senanayake

The CSE Regulations prohibit market manipulation and states as follows: Member firms shall not execute or cause to be executed purchases of any listed security at successively higher prices, or sales of any such security at successively lower prices, for the purpose of creating or inducing of false, misleading or artificial appearance of activity in such security or for the purpose of unduly or improperly influencing the market price for such security or for the purpose of establishing a price which does not reflect the true state of the market in such security.

Member firms shall not, also (a) execute any transaction in such security which involves no change in the beneficial ownership thereof; or, ( b) enter any order or orders for the purchase of such security with the knowledge that an order or orders of substantially the same size at substantially the same price, for the sale of such security, has been or will be entered by the same or related parties; or ( c) enter any order or orders for the sale of any such security with the knowledge that an order or orders of substantially the same price, for the purchase of such security, has been or will be entered by or for the same or related parties.

Who can engage in market manipulation? The Rules refer only to the trading technique of market manipulation which is to execute trades at higher and higher prices in order to create a false market.

But who can manipulate the market? It is the high net worth individuals in cahoots with the brokers. A market manipulator will first select a share which is illiquid and where he already has a large holding. If he wants to raise the price he must entice many buyers to buy the share. He can either do trades with a connected company without any change in the beneficial ownership to create a false market and also circulate through the brokers some price sensitive information say that some Government body is going to buy a large quantity at an above market price; which information is not already known to the market. He can get such price sensitive information from the company either himself as a large shareholder or through an insider in the company. Sometimes the information may even be false or exaggerated. But the retail investor trusts his broker and buys the share on his advice. The share rises throughout the manipulated period and then falls freely after the period of manipulation is over. Those small investors who have been urged to buy these stocks by their investment advisors are likely to be saddled with losses since they cannot immediately act.

The volatility is particularly high during the period when the manipulator sells. The Crossings Rule enables two broker firms to pre-arrange a trade and match immediately when the seller or the buyer quotes his bid or offer and allows (b) and (c) to be violated.
(Courtesy News 360)

(The writer is an economist and is the General Manager of a Colombo based stock brokering firm. You can reach him via raja.senanayake712@gmail.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it )

source - www.dailymirror.lk