GIPHY / istock / getty

What Is Market Manipulation?

Market manipulation refers to affecting the supply or demand of assets. Whether the stock market is “rigged” can be a loaded question – one that the hyper-volatility of formerly-failing stocks such as GameStop and AMC Entertainment Holdings have us examining in-depth.

🤔 Understanding market manipulation

In 2018, Merritt Fox, Lawrence Glosten, and Gabriel Rauterberg wrote an article on stock market manipulation in the Yale Journal on Regulation. These three scholars – two members of Colombia University, and one of the University of Michigan – wrote that “manipulation may be the most controversial concept in securities law…. [It is] both under-inclusive and overinclusive in comparison to whatever is the ideal baseline.”

In other words, there is no good measure of manipulation in a system with so many moving partners and pieces. As a result, the legal system often appears to miss big players it will struggle to prosecute while homing in on smaller infractions it can successfully penalize on the public stage.

According to Investor.gov, market manipulation is when “someone artificially affects the supply or demand for a security” for personal gain. This “someone” may be an investor or group of investors, the issuing corporation, or a third-party scammer.

Technically, market manipulation is illegal. But some methods are difficult to track, and SEC regulations may be unclear on how to proceed in certain situations. (The GameStop/Wall Street Bets controversy is one such instance.)

Furthermore, some methods of manipulation may be unethical but technically legal, or both ethical and legal but ultimately inequitable. The ease of perpetuation – and level of success – often depends on how much trading power the entity in question maintains.

Unfortunately, individual investors are often the ones who suffer as the result of such activities. With the possible exception of Elon Musk, no one person (or at least, no typical retail investor) has the ability to sway the entire market on a whim…in theory.

What this means for you

Fortunately, the internet has been something of an equalizer for retail investors. While the wealth disparity is a subject for another day, the internet has made it possible for the average investor to access important data, allowing them to make timely, better-informed decisions.

And though the market isn’t rigged by definition, manipulation – legal and otherwise – still occurs from time to time. As a savvy investor, it’s up to you (and your financial advisor) to spot manipulative movements and avoid actions that will lead to your financial downfall.

One of the more proactive steps you can take is to carefully examine low-volume, microcap, and penny stocks before you invest. Due to less watchful eyes and, in some cases, relaxed trading regulations, these stocks are more susceptible to pump-and-dump and churning schemes.

For similar reasons, it’s ideal to avoid day trading. While making a few pennies per trade can add up in the long run, you’re also more likely to fall prey to market schemes based on rumors or falsely inflated numbers. Taking the time to vet your purchases – and your sources – before investing is the best defense against bad information.

But perhaps the best thing you can do to sidestep manipulative practices is to design a financial plan and stick to it. In very well- or poorly-performing markets, you may often feel pressure to deviate from your goals to avoid short-term pitfalls or ride the wave to riches. But more often than not, waves crash and slumps even out, and you’re left in the same – or worse – position than if you had maintained your course.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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