Stock Market Manipulation - Types

A true history of Finance Fraud would have to start in 300 B.C., when a Greek merchant name Hegestratos took out a large insurance policy known as bottomry. Basically, the merchant borrows money and agrees to pay it back with interest when the cargo, in this case corn, is delivered. If the loan is not paid back, the lender can acquire the boat and its cargo.

Hegestratos planned to sink his empty boat, keep the loan and sell the corn. It didn't work out, and he drowned trying to escape his crew passengers when they caught him in the act. This is the first recorded incident as of yet, but it's safe to assume that fraud has been around since the dawn of commerce.

If you think investors are protected from all market manipulations by SEBI, RBI, Government and Stock Exchange Policies, they make a good team, but you live in a dreamland. Financial Market Manipulation, is the new trend and it takes a variety of forms, including:

·         Dark Pools: What is a dark pool? Institutions trading large blocks of stocks over the counter among themselves, out of public view. Investigating authorities say, that it is investigating to determine if dark pool activity detracts from the quality of publicly quoted prices of the stocks involved. There are agreements, often written, among group of traders to delegate authority to a single managing institution to trade in a specific stock for a specific period of time and then to share in the resulting profits or losses. It’s just like a Mutual fund, but without any governmental restrictions and without public knowledge.

·         Churning: When a trader places both buy and sell orders at about the same price and to prove the (undue) increase, the promoter advertises a possible future plan. The increase in activity is intended to attract additional investors and increase the price. In simple words, just by increasing the volume of trade (at the expense of brokerage) investors are manipulated to think that the increase in volume and price is due to the future plans of the company. There are different ways of Churning like, Ramping the market, Wash Trading

·         Stock Bashing: This scheme is usually orchestrated by savvy online message board posters (a.k.a. "Bashers") who make up false and/or misleading information about the target company in an attempt to get shares for a cheaper price. This activity, in most cases, is conducted by posting libellous posts on multiple public forums. The perpetrators sometimes work directly for unscrupulous Investor Relations firms who have convertible notes that convert for more shares the lower the bid or ask price is; thus the lower these Bashers can drive a stock price down by trying to convince shareholders they have bought a worthless security, the more shares the Investor Relations firm receives as compensation. Immediately after the stock conversion is complete and shares are issued to the Investor Relations firm, consultant, attorney or similar party, the basher/s then become friends of the company and move quickly to ensure they profit on a classic Pump & Dump scheme to liquidate their ill gotten shares (see P&D). Example: In January 2005, someone using the name “Rahodeb” went online to a Yahoo stock-market forum and posted this opinion: No company would want to buy Wild Oats Markets Inc., a natural-foods grocer, at its price then of about $8 a share.“Would Whole Foods buy OATS?” Rahodeb asked, using Wild Oats’ stock symbol. “Almost surely not at current prices. What would they gain? OATS locations are too small.” Rahodeb speculated that Wild Oats eventually would be sold after sliding into bankruptcy or when its stock fell below $5.
A month later, Rahodeb wrote that Wild Oats management “clearly doesn’t know what it is doing. . . . OATS has no value and no future.”The comments were typical of banter on Internet message boards for stocks, but the writer’s identity was Rahodeb, which was an online pseudonym of John Mackey, co-founder and chief executive of Whole Foods Market Inc. In 2007, his company agreed to buy Wild Oats for $565 million, or $18.50 a share.The company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb. It’s an anagram of Deborah, Mr. Mackey’s wife’s name. Rahodeb cheered Whole Foods’ financial results, trumpeted his gains on the stock and bashed Wild Oats.

·         Pump and dump: This scheme is generally part of a more complex grand plan of market manipulation on the targeted security. The Perpetrators (Usually stock promoters) convince company affiliates and large position non-affiliates to release shares into a free trading status as "Payment" for services for promoting the security. Instead of putting out legitimate information about a company the promoter sends out bogus futuristic plans (the "Pump") to millions of unsophisticated investors (Sometimes called "Retail Investors") in an attempt to drive the price of the stock and volume to higher points. After they accomplish both, the promoter sells their shares (the "Dump") and the stock price falls like a stone, taking all the duped investors money with it. Example: A 15-year-old named Jonathan Lebed showed how easy it was to use the Internet, to run a successful pump and dump. Lebed bought penny stocks (stocks with negligible price) and then promoted them on message boards, pointing at the price increase. When other investors bought the stock, Lebed sold his for a profit, leaving the other investors holding the bag. He came to the attention of the U.S. Securities and Exchange Commission (SEC), which filed a civil suit against him alleging security manipulation. Lebed settled the charges by paying a fraction of his total gains. He neither admitted nor denied wrongdoing, but promised not to manipulate securities in the future.
Another example can be of Langbar International, Started as Crown Corporation, Langbar was the biggest pump and dump fraud on the Alternative Investment Market, part of the London Stock Exchange. The company was at one point valued greater than $1 billion, based on supposed bank deposits in Brazil which did not exist. None of the chief conspirators were convicted, although their whereabouts are known. A patsy who made a negligent false statement about the assets was convicted and banned from being a director.The investors who lost as much as £100 million sued one of the fraudsters and recovered £30 million.

·         Stock Runs: When a group of traders create activity, news or rumours (futuristic) in order to drive the price of a security up. An example is the famous Guinness share-trading fraud of the 1980s. In the US, this activity is usually referred to as painting the tape. Runs may also occur when trader(s) are attempting to drive the price of a certain share down, which is also referred to as Bear Raid, although this is rare (see Stock Bashing).

·         Lure and Squeeze: The way it works is a company is very distressed on paper, with impossibly high debt and consistently high annual losses, but very few assets, making it look as if bankruptcy must be imminent.
1)The stock price gradually falls as people new to the stock short it on the basis of the poor outlook for the company, until the number of shorted shares greatly exceeds the total number of shares that are not held by those aware of the lure and squeeze scheme (call them "people in the know").
2) In the meantime, people in the know increasingly purchase the stock as it drops to lower and lower prices.
3) When the short interest has reached a maximum, the company announces it has made a deal with its creditors to settle its loans in exchange for shares of stock (or some similar kind of arrangement that leverages the stock price to benefit the company), knowing that those who have short positions will be squeezed as the price of the stock sky-rockets.
4)Near its peak price, people in the know start to sell, and the price gradually falls back down again for the cycle to repeat.

·         Quote stuffing: This is a tactic employed by high-frequency traders that involves using specialized, high-bandwidth hardware to quickly enter and withdraw large quantities of orders in an attempt to flood the market, thereby gaining an advantage over slower market participants. Thus, you would observe greater deviation in stock prices in 1^st 10 mins and last 10 mins of the market.

·         Cornering (the market): Purchasing enough of a particular stock, commodity, or other asset to gain control of the supply and be able to set the price for it. This can be done by high net worth corporate or Dark Pool institutions, or to a stock whose market capitalization is low but number of shares is high. Example: During the financial crisis of 2007-2010, Porsche cornered the market in shares of Volkswagen, which briefly saw Volkswagen become the world's most valuable company. Porsche claimed that its actions were intended to gain control of Volkswagen rather than to manipulate the market. In this case, while cornering the market in Volkswagen shares, Porsche contracted with naked shorts resulting in a short squeeze on them. It was ultimately unsuccessful, leading to the resignation of Porsche's chief executive and financial director and to the merger of Porsche into Volkswagen. One of the wealthiest men in Germany's industry, Adolf Merckle, committed suicide after shorting Volkswagen shares.        

·         Insider Trading: When an insider, with important confidential information about a company, take advantage of that knowledge by buying or selling stocks himself, or informing or tipping someone else to make a profit or avoid losses. It is one of the easiest ways to make quick profits and thus you can find many examples online. Example: Martha Stewart: The Homemaking Hoaxer, R. Foster Winans: The Corruptible Columnist,  Levine, Siegel, Boesky and Milken: The Precognition Rat Pack.

      Market Manipulation is nothing but an unfortunate fact of the financial market. Stocks and commodities have always been subject to manipulation, whether by individuals, pools, central banks or even governments. If you are unable to come to terms with this reality then it’s best to avoid participating in the market altogether. But if you’re able to come to grips with this then there is money to be made once you’re able to spot the tell-tale signs of manipulation, a skill which becomes better with experience.

Facts, Figures, Accusations and are taken from Wikipedia and Investopedia.