Introduction:
Insider trading and market manipulation are unethical stock trading based on non-public information. Market manipulation makes insider trading unlawful in the US and many other nations. Insider trading involves corporate or industry insiders purchasing and selling securities. This data can provide stock traders with an unfair advantage. Market manipulation includes a variety of methods that artificially raise or lower stock values. These include propagating false rumors, manipulating markets through buy-and-sell orders, and manipulating prices with high-frequency trading. Insider trading and market manipulation are banned and carry heavy penalties.
Insider Trading and Manipulation in the Stock Market
Insider trading occurs when someone trades shares with non-public knowledge. Employees, consultants, and other insiders are usually accountable. No golfing or insider trading. Technology has professionalized the stock market, benefiting buyers and sellers. Today’s tools enable quick insider knowledge applications. BaFin reports increased insider trading. Because economic and industrial espionage increasingly uses inside information, unlawful insider trading no longer requires an insider.
BDO guards against insider trading and market manipulation. The compliance management system may assist prevent insider trading and market manipulation in this situation. Compliance procedures include policies, monitoring, awareness-raising, whistleblower reporting, and sanctions.
Despite these protections, BDO forensic investigators and IT forensic specialists will be vital in disclosing the complex technological processes involved in trading securities if suspected market manipulation or insider trading occurs. We help firms, government agencies, and prosecutors understand complex situations with many known and unknown parties.
How Can Individual Investors Guard Against Stock Market Manipulation?
Stock market manipulation occurs when dishonest people attempt to artificially raise or lower stock values. The Securities and Exchange Commission has a difficult time creating “fair, orderly, and efficient markets” as a result of this kind of manipulation. According to the survey, normal investors have lost billions of dollars as a result of securities manipulation. Even while the SEC is vigilant about weeding out illicit trading practices, competent stock market manipulators know how to use sly tactics to avoid detection for years at a time.
Real-World Case Studies on Changing the Stock Market
The trading of a stock with the sole intent of creating buzz and artificially inflating its price is one sort of stock market manipulation. By arranging for their clients to place simultaneous buy and sell orders, stockbrokers can influence the price of a share. These transactions have no positive effects on the client and only raise the stock price.
Trading firms with significant ownership in a single company may engage in a practice known as “painting the tape,” in which they buy and sell their own shares, to create the illusion of increased trading activity. Dishonest stock traders sell their holdings when the price of their equities increases due to higher demand from other sources.
In pump-and-dump schemes, stock pumpers artificially inflate the value of an investment by making upbeat stock-related promises. Frequently, the fraudulent promoter is a well-known person or an influential social media user. When the stock price rises as a result of the capital inflow from new investors, the promoter will sell their holdings.
Making trading decisions based on confidential information is known as insider trading. Insider trading frequently occurs before a merger or acquisition. A biopharmaceutical company employee, for instance, was prosecuted for insider trading in 2020 after it was learned that Pfizer intended to acquire the business. The person reportedly bought stock options from the corporation. The acquisition would most likely result in a considerable increase in the value of his company’s shares, but this information wasn’t yet available to the general public.
For those in the know, “front running” is a smart way to make money. Brokers are unable to buy or sell securities based on the needs of their clients. A broker may forecast that the price of a stock will rise if they discover that a client plans to buy a significant quantity of shares. A quantitative analyst was accused by the SEC of stealing $8.5 million from two important clients of asset management companies.
As a result of incomplete financial data reporting, trade manipulation has a lot of potentials. By paying the Securities and Exchange Commission $6 million in 2021, a healthcare company resolved accusations that it had inflated its earnings per share. (EPS). EPS can be calculated by dividing a company’s net income by the entire market value of its outstanding shares. Due to the fact that investors are attracted to successful businesses, this figure helps to increase the price of that company’s shares. An extremely low number of occurrences of the number four in accounting statements led investigators to the conclusion that the accountants had been rounding numbers.
If an error is found in the financial statements by an independent auditor, the company is required to restate them. Companies are required to release a statement that updates the previous one and warns investors not to rely on it. Too often, companies wait until later quarterly reports to disclose restatements, at which point they are presented as trivial mistakes.
As the trading day comes to a finish, investors frequently make last-minute purchases and sales of assets. At the end of the day, the stock’s value is more prone to trading. Due to “price drift” on the final trading day of fiscal quarters, analysts have come to the exceedingly unsettling conclusion that this form of market manipulation is alarmingly common.
Purchasing stock on the last trading day of the month is known as “window dressing,” a form of market manipulation related to “marking the close.”
Which Stocks Are the Most Frequently Manipulated?
Since the Securities and Exchange Commission (SEC) doesn’t conduct as much research on over-the-counter equities, also referred to as “penny stocks,” they are more prevalent. Brokers are encouraged to advertise them due to the potential for significant commissions. The use of pump-and-dump methods is one method of manipulating penny stocks.
If You Suspect Stock Manipulation, What to Do?
The average investor frequently cannot tell whether covert variables have affected a stock. For instance, the SEC cautions investors to exercise caution when dealing with well-known individuals who quickly profess an interest in a company or financial product online but who have never previously disclosed such a desire.
Manipulation is a serious issue when it comes to financial goods that consistently defy expectations. Market Watch claims that the vast majority of mutual funds are unable to outperform the market. Nevertheless, it still occurs regularly.
Who Monitors Market Manipulation?
Regulator surveillance and whistleblowers have reduced market manipulation. The Market Abuse Unit’s Analysis and Detection Center uses advanced algorithms to identify market manipulation trading trends. Brokerages must also monitor stock manipulations.
LPL paid FINRA $1.5 million for failing to supervise stockbrokers to avoid market manipulation. FINRA determined that LPL stockbrokers marked the close and matched trades and did not provide supervisors with proper training or surveillance tools.
What Can Stock Market Manipulation Victims Do?
Kurta Law offers free case evaluations if you suspect your stockbroker manipulated the market. Our financial product lawyers can advise you on how to proceed with your FINRA arbitration case.
Conclusion:
Insider trading and manipulation in the stock market can be damaging to both investors and the markets. Insider trading can give certain individuals or groups an unfair advantage, while market manipulation can lead to increased volatility and market disruptions. Regulation and enforcement of insider trading and market manipulation laws are essential for maintaining a fair and efficient stock market.
