Market manipulation occurs when an agent that has the ability to alter the market acts on it to achieve a certain objective. It is a practice that is highly persecuted for its sanction, since it prevents the market from working efficiently.
The concept of market manipulation is generally linked to financial markets although it can occur in any other type of market.
Large amounts of capital are accumulated in the financial markets and this means that both profits and losses can be very large. Under this circumstance, there are agents who, due to excessive ambition, to make money, want to alter the market for their own benefit.
It should be noted that not everyone has the ability to manipulate the market, since a certain authority or great organizational power is necessary. For example, if you only want to manipulate the market, it will be practically impossible for you to do so.
However, there may be, for example, certain public figures with a large number of followers, large companies or investment funds with a lot of available capital that, through a series of actions, can make the market move according to their interests.
Therefore, it must be made clear that if someone moves the market for their own benefit, other agents that participate in it will be harmed, for the simple fact that the market has not behaved freely.
Types of market manipulation
There are different ways to alter the free functioning of a market. Below, we explain some of the most common both in the financial markets and in others:
- Distribution of zones: This practice occurs outside of financial markets. It consists of certain companies that participate in a market sharing certain areas so as not to compete and to be able to establish more beneficial prices for them.
- Price fixing: The companies in a market can agree to establish minimum prices to guarantee certain profitability.
- Whale Wall Spoofing: It is a practice of the financial markets in which an agent with a large amount of available capital places buy orders if he wants the price to go up or sell if he wants the price to go down. Once the objective is achieved, the agent withdraws the first orders and executes new ones with more volume.
- Pump and Dump: It consists of various market agents organizing and agreeing to artificially raise the price of a financial asset. Once the euphoria is created in the market and more investors enter causing the price to rise even more, the participants in the Pump and Dump sell their assets at a profit. It is very common in the world of cryptocurrencies.
- Stop Hunting: This method consists of blowing the investors’ stop loss. An agent x with a lot of capital executes large sell orders to lower the price of the asset and jump the stop loss (this means that the price has reached the minimum established from which investors will go out to sell the asset to avoid having higher prices). losses). When stop losses are triggered, the price falls further and broker x can buy at a lower price.
Consequences of market manipulation
The consequences that market manipulation can have are very damaging in two areas. The first of these is the profitability of the rest of the investors, since these practices will cause many agents to lose money due to the malpractice of a few.
On the other hand, there are the legal consequences. These types of practices are highly persecuted by the justice of the countries. The State has to be in charge of guaranteeing the free functioning of the market and therefore imposes sanctions for all those who act against this principle.
Sanctions can range from financial fines to prison sentences, so it is better not to incur in this type of practice.