Market Manipulation: A Survey

Abstract

Despite the significant attention that market manipulation has received in recent years many aspects of it are poorly understood. This article identifies from the theoretical and empirical literature what we do and do not know about market manipulation, and suggests directions for future research. We know that manipulation is possible and that it occurs in a wide variety of markets and circumstances. In contrast, we know little about how often manipulation occurs, its effects and how it responds to regulation. Suggested approaches for future research on these issues include: (1) collecting more comprehensive data sets of manipulation cases; (2) using detection controlled estimation methods to overcome sample selection and partial observability problems and (3) conducting controlled experiments. This article also constructs a novel and broad taxonomy of the different types of market manipulation and discusses approaches to defining manipulation.

Taxation of Economic Rents

“…Banks derive rents from implicit government guarantees to bail them out in a crisis (Admati and Hellwig, ). Actors in the financial sector can also externalize some of their costs (Di Tella, ) and manipulate the market (Putniņš, ). These cases fall in the category of political rents as they result from insufficient regulation.…”

Trade-based manipulation: Beyond the prosecuted cases

“…The empirical evidence on trade-based manipulation to-date has been either indirect or by examining known cases of manipulation (Putniņš, 2012). Khawaja and Mian (2005) provide indirect evidence of pump-and-dump manipulation in Pakistan's stock market where brokers manipulate price to profit from positive feedback traders.…”

“…Aggarwal and Wu (2006) show that manipulated firms have significantly higher daily trading volume during the manipulation period compared to similar non-manipulated firms. Such manipulative schemes usually involves wash sales, matched or synchronized orders and pools where the main objective is to artificially increase the price with no genuine change of ownership (Putniņš, 2012). Further as Jiang et al (2006) state, such artificial trading usually proceeds through large-trades.…”

Trading networks, abnormal motifs and stock manipulation

“…Motif A in figure 2.3 is a self-loop, containing a single trader who sells shares to herself. Such motifs are reminiscent of wash sales, which are improper transactions in which the buyer and seller is the same person such that there is no genuine change in ownership (Putniņš 2012). If a trader utilizes the technique of wash sales, her trading behavior will be identified as motif A from the trading network.…”

“…Motif B is the simplest structure embedded in the manipulation technique of stock pools. As described by Putniņš (2012), stock pools are a collusive group of manipulators trading shares back and forth among themselves. Cliques investigated in Palshikar and Apte (2008) or collusion sets of circular trading investigated in Islam et al (2009) are special examples of stock pools.…”