Market manipulation facts for kids
Market manipulation is like playing a game unfairly in the world of money. It happens when someone tries to trick the stock market or other financial markets. Their goal is to make prices go up or down artificially. This is done to make money for themselves. Imagine someone spreading false rumors about a popular video game company. They might do this to make more people buy or sell its shares.
This kind of unfair play is against the rules in most countries. Laws are in place to keep markets fair for everyone. This helps protect people who invest their money. For example, countries like the United States, the European Union, and Australia have strict rules against market manipulation.
Contents
Understanding Market Manipulation
What is Market Manipulation?
Market manipulation means someone intentionally changes how much a stock or other investment seems to be wanted or available. They do this to influence its price. This can involve sharing wrong information. It can also mean making trades that look misleading. The goal is always to control the price for their own benefit.
Why is it Against the Rules?
Market manipulation is against the rules because it makes the market unfair. It can cause people to lose money based on false information or artificial prices. This breaks the trust that people need to have in financial markets. Laws are designed to ensure that everyone has a fair chance. They also make sure that prices truly reflect the value of things.
Different Ways People Manipulate Markets
Working Together to Change Prices
Sometimes, groups of people work together to try and change market prices. This is often done to make a quick profit.
Price Pools: Group Efforts
A "pool" is when a group of traders agrees to work together. They let one person manage their trades for a specific stock. They do this for a set time. Then, they share any profits or losses. This kind of agreement is often against the rules because it can be used to unfairly control prices.
Creating a Buzz: "Runs" and "Ramping"
- Runs: This happens when a group of traders creates a lot of activity or spreads rumors. Their goal is to make the price of an investment go up. In some places, this is called painting the tape.
- Ramping: This involves actions meant to artificially raise the price of listed investments. It also tries to make it look like many trades are happening. This is done to make a quick profit.
Pushing Prices Down: "Bear Raids"
A bear raid is the opposite of ramping. It's an attempt to push the price of a stock down. This is done by selling a lot of shares. Sometimes, they even sell shares they don't own yet, hoping to buy them back cheaper later. This is called short selling.
Tricking the System with Technology
With today's fast computers, new ways of manipulating markets have appeared. These methods often use advanced technology.
Fast Trading Tricks: "Quote Stuffing"
Quote stuffing uses very fast computer programs. These programs can quickly place and cancel many orders. They try to flood the market with information. This can give them an advantage over slower traders. It's like trying to confuse others with too much information.
Playing Across Different Markets
Cross-market manipulation happens when a trader makes moves in one market. They do this to change the price of an investment in a completely different market. Their real goal isn't to profit from the first trade. Instead, they want to use its effect to make money in the second market.
Quick Orders: "Pinging" and "Spoofing"
- Pinging: This involves making small orders and then quickly canceling them. A computer program does this. The idea is to make other traders react. This can reveal what those other traders plan to do.
- Spoofing: Similar to pinging, this uses a computer program to submit and cancel many bids or offers. This is done to trick others and manipulate the price of an investment.
Predicting Trades: "Electronic Front Running"
Electronic front running is like knowing what someone else is about to do before they do it. It uses special financial technology. This technology looks at price changes and transactions. It helps traders make their own trades just before a big price change happens. This gives them an unfair advantage.
Taking Control: "Cornering the Market"
Cornering the market means buying so much of an investment or product that you control its supply. This allows you to set the price, almost like having a monopoly.
The Silver Market Story
A famous example happened in the late 1970s and early 1980s. Two brothers, Nelson Bunker Hunt and William Herbert Hunt, tried to control the world's silver market. At one point, they owned rights to more than half of all the silver available. During their buying spree, silver prices went from about $11 an ounce in September 1979 to almost $50 an ounce by January 1980. However, the price later dropped sharply. This showed how risky and unstable such manipulation can be.
Related Topics to Explore
- Ponzi scheme
- Insider trading
- Abuse of information
