Investing > Market Manipulation Explained

Market Manipulation Explained

 Unfortunately, markets are manipulated. But knowing when and how they're being manipulated is essential to keeping your assets safe.

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Updated April 22, 2022

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Price manipulation, stock manipulation, and market manipulation—they all mean the same thing: someone trying to influence the market to scam investors.

The practice is unethical, and often illegal, but that doesn’t mean it can’t happen. In fact, it might be happening more frequently now than ever because of the growth of markets and the ever increasing number of active investors. A record breaking 10 million retail investors joined the market in 2020 alone. 📈

Knowing what market manipulation is is just one step in keeping yourself safe in the open waters of the stock market. Read on to find out what it is, how manipulators work, and most importantly, how to spot manipulation so you can stay far, far away.

Sound good? Let’s get to it! 👇

What you’ll learn
  • What is Market Manipulation?
  • How Market Manipulation Works
  • Spreading Misinformation
  • Manipulating Trade Volume
  • Pump and Dump Scams
  • Cornering the Market
  • Tips for Avoiding Manipulation
  • Assets Susceptible to Manipulation
  • Forms of Market Manipulation
  • Conclusion
  • FAQs
  • Get Started with a Stock Broker

What is Market Manipulation? 📚

In its simplest form, market manipulation is the intentional and artificial inflation or deflation of the price of a commodity, asset, or other product in order for the market manipulator to make a profit. Manipulation interferes with the free trade of assets, decreases market efficiency, and is dangerous for individual investors who are overextended in the asset that’s being manipulated. It can happen to anyone, and it takes more than having a top stock broker to keep yourself safe.

As far as we know, market manipulators have been around since time immemorial. Aristotle wrote about a market manipulator in Politics. Wherein Thales of Miletus bought up all the olive-oil presses right before a big olive harvest and then rented them out for exorbitant sums.

Market manipulators have been around for a long time, and it’s not likely that they’ll go away any time soon. But these days, their tactics have evolved quite a bit from simply buying up olive-oil presses. Now they engage in a variety of scams that we’ll explore, from the infamous pump-and-dump, to lesser known schemes like wash trading, and bear raiding.

How Market Manipulation Works 🏗

Market manipulation works by artificially changing the price of an asset. Manipulators will often employ different strategies depending on what their goals are and what opportunities can be exploited. In some cases they will spread misinformation either on the internet, in-person, or in what the SEC calls “boiler rooms”’ where conmen make phone calls to as many people as possible and exhort them into buying large sums of bad assets.

Whatever tactics are being employed, the objective is the same:

1. Create a Discrepancy Between the Value of a Stock and the Price 

This is either done by hyping up the stock, or in some cases, bashing the asset. Manipulators employ a variety of other tactics to make the price of an asset appear like it’s moving, even when it’s not. They utilize techniques like simultaneously placing huge buy orders and sell orders to make it seem like volume is increasing, when in reality it’s just one person or corporation buying the same stock over and over again.

2. Attract Investors

The whole point of market manipulation is to take money from other traders. Different traps will find different marks. For example, for individuals who know how to engage in momentum investing they might be attracted to increased volume and sudden price spikes from overhyped stocks. The more activity around a stock translates to higher volume, higher volume can help increase hype, leading the asset higher and higher.

3. Exit the Position

After the price of the asset has been hyped (or bashed), and there is sufficient activity in the market, whoever was doing the manipulation is going to close their position. Or in some cases, scoop up a bunch of stock at a discount price. 

This is when investors get scammed. There are countless individuals left holding the bag of an asset that isn’t worth nearly as much as they paid for it. Otherwise, they were bamboozled out of a good stock that they sold off in panic. The manipulator walks away with a profit and everyone else is down for the day.

Oftentimes regulators have a difficult time spotting all kinds of manipulation because it can be difficult to prove. For one thing, regulators have to determine whether rallies or drops in stock price are maliciously coordinated, or if it is just a trend of excitement or panic.

This is the basic outline behind every manipulation technique, but knowing the basics is just the start. Staying safe in the market will involve knowing the specific scams that these people use. One of the most visible techniques is especially pertinent to anyone who uses the internet frequently:

Spreading Misinformation 📣

You know it, you hate it, you see it all the time: misinformation. We aren’t just talking about goofy clickbait that your grandma is sharing on Facebook about why millennials are devolving into apes because they use their smartphones so much. This is misinformation that could end up costing you money.

In the ancient times of market manipulation, manipulators didn’t have such easy access to the populous as they do now. They would use the “boiler room” method to phone up as many people as possible, or even go door to door and try to convince people to buy trash. They would even stoop so low to spam messages to fax machines. Ew… fax machines.

But now, you’re much more likely to see scams on internet messaging boards, spammed to your inboxes, or even posted on Twitter. 📬

The goal of this misinformation is to convince investors to act a certain way. To prey upon anxieties and act erratically even when market conditions are seemingly normal. It’s a devious way to pry peoples’ money away from them, even people who are the set-it-and-forget-it type who invest with good ETF brokers can fall for the misinformation and think they are at risk of losing out. It can be a major FOMO machine.

The internet isn’t the only popular medium for spreading misinformation. Sometimes hedge funds will intentionally release analytics reports that either taut or deface a small company that they have taken a short position against.  

In recent history we’ve seen this done with popular stocks like Gamestop and Blackberry. These hedge funds have often taken a short position on the asset that they deface, and when the price is driven down by scared investors, they make a huge profit by manipulating the numbers and the managers likely pocket a large share of the money.

How to Avoid Misinformation 💡

Avoiding misinformation is one of the trickier topics when discussing market manipulation. It’s not always straightforward what outlets you can trust. If you’re learning to trade the news you may know that even established news sources can produce compromised material that compels you to open or close positions you wouldn’t normally.

You can start by relying on the fundamentals that you learned when we first got into investing. Or the fundamentals we should have learned before we threw cash into a meme stock or altcoins… oops. 😬

When we discuss how to invest, we talk about how all investors need to have a plan and a goal. If you are investing for retirement and just want to stay in for years at a time, you shouldn’t concern yourself with the small day-to-day movements of the market. 

You should know that the sky isn’t falling every time there is a hot stock on the block. If the market rebounded so quickly from COVID, and the government stepped in to make sure the wheels didn’t fly off the wagon, you know that the best philosophy in life is “don’t worry.”

Covid crash rally
After the COVID crash, most major indices had made a full recovery in a matter of months, and continued their growth. Image by TradingView.

However, if you’re a daytrader you are going to be taking risks. Some of this is going to involve your good judgment (as a day-trader you should be used to hearing this). You can always look at the fundamentals of a company to see if the price trends are reflecting real value, or if it’s just a lot of excitement. 

Something else you can do is be cautious of penny and OTC stocks. You should know that the more obscure assets are some of the riskiest. If you’re daytrading the best way to keep yourself safe is knowing all of the different techniques of manipulation so you know when you have the potential to make a profit and when you should duck out.

Example: Bill Ackman’s “Hell is Coming” and Elon Musk’s Lowkey Crypto Manipulation 📝

Sometimes market manipulation isn’t coming from bot accounts and unknown, shady, conmen. Sometimes the con happens right before our eyes on national television. That’s what some say happened when the famous hedge fund manager of Pershing Square Bill Ackman went on CNBC and caused a panic in the stock market.

Before showing up on CNBC and telling everyone that “hell is coming,” and that “America will end as we know it,” Ackman had placed huge bets against that market that scored him nearly $2B in profits. Ackman took advantage of the panic of coronavirus to make money, and while some say his actions constituted market manipulation, there hasn’t been much news from regulators.

But it doesn’t stop with Ackman’s bets at the beginning of the Covid pandemic. There is another celebrity known to hop on Twitter and agitate crypto markets at the slightest provocation: Elon Musk.

It’s well known that the world’s richest man has had a lot to say on everything from Bitcoin to Dogecoin. His electric car company Tesla even bought $1.5B worth of bitcoin and was planning to accept it as payment for their vehicles, only to later rollback those statements when discussing the environmental impact of bitcoin mining and trading.

Elon Musk tweet
Musk’s tweet on Feb 4 2021 strenthened the momentum behind Dogecoin, bringing it to new highs. Image by TradingView.

Many of Musk’s statements have led directly to sell-offs or buying frenzy in whatever market he feels like pontificating on. Staying safe from this kind of market movement involves not buying into the frenzy and instead keeping a cool head like you learned in trading psychology 101.

Manipulating Trading Volume 📊

Manipulating trading volume is a common way for shysters to attract investors to a commodity in order to increase its price. Investors should understand the role of volume in investing. Artificial volume increases often come in what is called wash trading or churning. This is normally done by big players on the market who have so much capital that they can pay for thousands or even tens of thousands of orders simultaneously. 

They open an equal number of buy orders and sell orders at the same price so many trades are executing quickly and being filled immediately. This can change the way that other traders on the market behave and even increase the volatility of algorithmic trading mechanisms.

Example: Flash Crash of 2010 👨‍💻

An example of trade volume manipulation comes to us from the flash crash of 2010. The crash was spurred on by a single individual who employed several manipulation techniques including layering and spoofing to confuse the algorithms on Wall Street to begin a huge automatic sell-off. The high frequency orders caused the U.S. stock market to crash by over $1 trillion. It’s okay though, he did house arrest for a year.

Flash Crash of 2010
Even though the flash crash of 2010 was a daily event, it made the markets afraid, and it took the S&P 500 a full 6 months to get back to its previous high. Image by TradingView.

Manipulation opened the door for an incredible amount of profit to be made, and while the flash crash lasted only around 30 minutes, it made the trader Navinder Sarao millions. The flash crash came on the tail of streamlined legislation that would allow traders to get more accurate prices on their commodity and modernize trading. Five years later, in 2015, the flash crash led to increased regulation and a ban on layering.

How to Avoid Manipulated Trading Volume 🕵️‍♂️

Investors can keep away from manipulated trade volume by investigating what is creating activity. Normally stocks aren’t going to skyrocket for an unknown reason. There will be something, either company news, online hype, or information from insiders that has led to increased trading volume.

If you don’t see any of that, odds are you are dealing with something else, and that could just be volume manipulation. If you are new to trading, you can avoid this kind of scam altogether by opting for long term strategies where fluctuations like this will matter less.

Pump and Dump Scam ⚠

Pump and dump is one of the most common scams and you’ve probably heard about it over and over again if you follow the news. Investors should be especially cautious of this type of scam when dealing with small or microcap stocks and less regulated commodities, such as crypto.

The pump and dump scheme is simple and can employ a variety of manipulation techniques. Scammers may try to pump up an asset by manipulating trade volume. They might also produce misinformation and try to hype a commodity by posting about it on online message boards, sending out spam emails, or even calling people. 

Sometimes, you will even see influencers hop on the scam and promote products because they were paid to or because they are in on the con. This gets interest in the commodity to rocket, and then after sufficient interest in the commodity is gained, whoever perpetuated the scam will exit. The manipulators often have a majority position and bought the asset when it was worthless or close to it.

The SEC warns that this is more common with shell corporations and penny stocks which can be bought up cheaply on OTC markets and then merged with other companies to give the appearance that there is a new listing on the market. In reality, it’s the same old garbage asset with a new paint job. Scammers employ this tactic because it circumvents going through the stringent IPO filings that the SEC requires. When the new asset hits the market, and when there is sufficient hype around the offering, the price skyrockets

Example: Squid Coin 🪙

Recently there has been a string of crypto and NFT pump and dumps including the SaveTheKids Scam and Squid Coin. In the case of Squid Coin, scammers got away with millions of dollars and sent the coin to $0 after exiting the market. The asset gained massive popularity due to online hype and likely exposure from being connected to the Netflix show of the same name.

example of a pump and dump
The case of SQUID is a very extreme example of a pump and dump, but such situations do occur with very small-cap assets. Image by TradingView.

The cryptocurrency wasn’t affiliated with the show but the massive amount of publicity helped launch the coin from a few bucks to nearly $3,000.

How to Avoid the Pump and Dump 🔍

As with other kinds of market manipulation, there is a potential for momentum and other day traders to make a profit along with the scammers, but being left holding the bag can mean huge losses. It’s easy to let FOMO take over, but remember to keep a cool head and not jump on a bandwagon that’s riding towards the edge of a cliff.

If you are set on investing in hyped assets, you will need to do independent research and try to weed through any misinformation that’s floating around. This will mean checking news sources and knowing that even major reporting companies might not be doing their due diligence. Check sources, and verify those sources are unbiased. It’s possible that in making sure you aren’t getting scammed you miss out on the craze altogether.

Cornering the Market 🎛

Do you like onions? Enough to buy 95% of all available onions in Chicago? Enough to lead to national shortages? Well, have we got a story for you (and we promise it’s related to market manipulation). 

In 1955, a couple of onion traders by the name of Vincent Kosuga and Sam Siegel bought up the 98% of the onions in Chicago by using futures contracts. They had so many onions hoarded and they were rotting in their warehouses. So many onions that when they flooded the market with 30 million pounds of them they dropped the price so low that they were worth less than the bags they were packed in. Before flooding the market they took short positions and when onion prices fell through the floor they made millions, nevermind the onion farmers they bankrupted on their way out.

This is what cornering the market is. Luckily for onion-lovers, it’s illegal to do it with onions as of 1958. Essentially, manipulators try to control the majority of a specific commodity and then they are able to set an arbitrary price by controlling the supply of said commodity. It can be immensely profitable, and it has been tried on many different kinds of commodities, but thankfully, it’s hard to pull off.

The main reason that cornering the market is so difficult is due to the size of global markets and the amount of capital and power needed to sufficiently dominate the supply chain of any one asset. Although there has been some debate as to whether cornering the market should be a legal classification or not, it has undoubtedly affected some profit margins and occurs to this day.

Example: Volkswagen and Porsche 🧐

In 2008 the Porsche company tried to corner the market on Volkswagen stock. Although, at the time Porsche claimed they were simply attempting to take over the company and not monopolize stock. 

Porsche's purchase of VW stock
 Porsche’s purchase of VW stock in 2008 made the stock jump to unprecedented heights—albeit for a very short while. Image by TradingView.

When Porsche bought all but 6% of the available shares of Volkswagen, they put investors and hedge fund managers who had short positions in a perilous situation. They had to cover their shorts when there wasn’t enough stock available to do so. This led to a panic in purchasing and made Volkswagen the most valuable company on the planet for a day before the trend receded and Porsche unloaded shares for desperate investors to purchase.

How to Avoid Market Cornering 🚧

Unfortunately, cornered markets are one of the most difficult to avoid of all the manipulation tactics, when it comes to certain commodities, such as foods, we are all affected. But when you’re on the stock market, you can take some steps to avoid being squeezed.

This means staying away from naked short positions. These positions have the opportunity for uncapped losses. You should only open positions that you can cover and try to keep yourself safe from extreme losses. Be sure to read up on short selling before opening any positions. If someone is trying to corner the market in the other direction and drive stock down, you’re pretty much out of luck unless you have vast sums of money to compete with whoevers buying up supply.

Tips for Avoiding Manipulation 📃

In case you want to put it as your desktop image, glue it onto your wall, or tattoo it on your forearm, here is a list of the most common market manipulation tactics, and how to spot them before it is too late.

Manipulation TacticWhat it IsHow to Avoid It
Fake NewsLarge and media-oriented companies alike will use misinformation to artificially affect the price of a stock.Verify the source of the news and try to corroborate reporting with different outlets. If you cannot, rely on stock fundamentals to analyze companies before you buy-in.
Pump and DumpSimilar to fake news, a manipulator will try to generate massive hype to increase a stock price before selling the goods and leaving investors with worthless assets.Pump and dump schemes are more common with penny stocks and altcoins. Investors should be careful when trading microcap companies and be cognizant of uncalled for hype when a stock is moving higher and higher. Is there really exciting news about the company, or is it one guy ranting?
Wash TradingLarge players will place buy and sell orders simultaneously for the same price. This is essentially moving an asset from a person’s left pocket to their right pocket. The spike in activity increases volume and attracts investors to an otherwise normal stock.Wash trading can be avoided by avoiding short-term investing. Investors can also try to see what brought on the increase in volume. Is there major news about a company? Is an earnings report coming up? If there’s no clear reason for what's generating the volume, you may suspect wash trading.
Bear RaidingWhen leviathans in the marketplace have huge sell orders they can tank a stock's price by hitting individual investors who have limit sell orders set. This has a compounding effect of increasing fear in the market and leading to more investors selling, thus driving the price down.Bear raiding may not affect you if you are a long term investor and do not have an outstanding limit sell order. If you are following a stock closely you can remove your limit sell order when you see a huge spike in sell volume.
Marking the CloseMarking the close is when manipulators will place many buy orders near the close of the market so when analysts look at the trends they will see that a stock is likely to open higher than it closed. This leads to artificially increased prices.You can avoid marking the close by seeing if there was any special news about a company and what orders were executed towards the end of the day. You can also stay away from this tactic by opting for long term investments.
LayeringWhen large buy or sell orders are made without the intention of executing the trade. This convinces traders to match the buy/sell order at the arbitrary price and seconds before the trade would be executed the manipulator pulls the order from the market while the traders order is filled.The best way for novice traders to avoid layering is by staying away from short-term investing. Over time, as your trading skills increase, you will become more adept at spotting layering and profiting from it along with whoever is manipulating the market.

What Assets Are Most Susceptible to Market Manipulation? ❓

It’s most common to see market manipulation in microcap assets and new markets, such as crypto or NFTs—small caps and penny stocks are a common target as well. Regulation isn’t as established in these markets and so it’s less likely that you’ll have watchdogs looking over the companies as you do with macro-cap stocks where the SEC and other authorities are supposed to be ever-vigilant for malfeasance.

You can avoid some market manipulation by staying away from these assets. If you are a more seasoned investor or day trader and know the signs, you may be able to use this information to your advantage and profit outright from the actions of other manipulators. But be warned, making money from what appears to be market manipulation is undoubtedly going to catch you some flack. After all, fingers are first pointed to whoever made a profit off of manipulation. That is the person who was most likely doing the manipulation.

Other Forms of Market Manipulation 🗃

There are so many tactics for market manipulation, too many to keep track of all the time. And there are new forms of manipulation happening that we may not be aware of. All of these have the same basic outcome, making one person richer, and a lot of other people poorer. Some of the most common we’ve listed here.

Cross-Market Manipulation ✔

Trading in one market to affect the price of an asset or a related asset in another market.

Cross-Product Manipulation ✔

Manipulators will trade in a commodity market and then use the physical product market (either from sales or limited supplies) to manipulate the commodity market.

Currency Manipulation ✔

Currency manipulation is only engaged in by central banks and governments. It’s the intentional deflation or inflation of a currency in order to affect trade and forex markets. Currency manipulation isn’t technically illegal but it is watched for by global organizations and can be punished by other countries.

Lure and Squeeze ✔

Manipulators will take a company that looks bad on paper and get investors to take short positions. When the number of short positions outnumbers the number of shares available for purchase, manipulators will “squeeze” investors by announcing good news for the company and short-sellers will rush to cover their positions by buying stock. Because there are not enough stocks to cover all the short positions, the price of the asset skyrockets.

Pools ✔

One trader is given an amount of money that is pooled from multiple individuals. The trader will then trade in a specific asset for a set period of time and the profits or losses are dispersed amongst the larger group.

Price-Fixing ✔

This is a scam perpetuated by the people who have access to price indicators. The scammers will report a number that is inaccurate to profit themselves.

Quote Stuffing ✔

Algorithmic traders will flood the market with a high frequency of orders and withdraw those orders. It’s not technically illegal, but it gives algorithmic traders with better hardware a steep advantage over anyone trading manually.

Spoofing ✔

Algorithms are able to place and withdraw a ton of orders without the outcome of them actually being filled. This increases interest or pessimism in a specific market and drives the price according to the manipulator’s goals. It’s most commonly used with High-frequency trading where the bots work fast enough that there’s not a worry of the order being actually fulfilled.

Stock Bashing (Poop and Scoop) ✔

This often happens online where “bashers” will attack a company in hopes of the price dropping and being able to scare investors out of their assets. This is when the bashers can swoop in and purchase the asset they are looking for at a discount and turn around and sell those when the price rebounds. This after people inevitably uncover that the claims were fictitious.

Conclusion 🏁

Market manipulation may seem like it’s old as markets themselves. And it probably is. What’s important is that you keep yourself safe from the tactics and know the signs before you enter into a trade that may seem like a once in a lifetime deal. In reality, it may be some scammer just trying to take your money.

Market manipulators employ a variety of tactics, from adjusting the volume, to making it seem like the price is going to rocket, to even just adjusting the end of the day trading trends. All of these are designed to fool other traders, and even though some of the activity is technically illegal, it doesn’t mean that it’s going to go away.

So remember to be on the lookout, check where company news is coming from, try to corroborate material with other outlets, and trust your gut, as they say, if something is too good to be true, it probably is.

Market Manipulation: FAQs

  • What Are Other Words for Market Manipulation?

    Market manipulation may also be known as price manipulation or stock manipulation. Specific forms of market manipulation are known as pump and dump, poop and scoop, layering, volume manipulation, spoofing, washing trading, bear raiding, and marking the close. All of these terms refer to specific tactics that manipulators use.

  • Is WallStreetBets Market Manipulation?

    It’s hard to say whether online forums are market manipulators or simply reactions to the excitement surrounding certain assets. Some people see the hype occurring on these forums as stock manipulation and are even suing some users who have profited

  • Are Memestocks Scams?

    It’s debated whether the rallies around meme stocks are being manipulated maliciously by individual investors, or if it’s simply fanatical hype that drives the assets so high. Either way, the outcome may be the same. 

    With radical volatility comes an increase in risk for investors and it leaves some people holding the bag for assets that may not be worth much. However, for some meme stocks, growth was based on the fact that the companies were undervalued and under attack by short-sellers who got squeezed, driving prices up.

  • Do Hedge Funds Manipulate the Market?

    Whether hedge funds manipulate the market or not might be contested depending on who you ask. While hedge funds certainly have been convicted of market manipulation in the past, it’s difficult for regulators to analyze and convict current activity. It’s always a good idea to be cautious when dealing with big fish in the market given the disproportionate power that they have over the price of assets.

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