Manipulation, Financial

The financial manipulation of stock market quotations consists in the altering of the ordinary course of supply and demand. This is done through devices that stimulate or depress stock prices, thus seriously distorting the market by not letting share prices be fixed naturally in free market exchange. In manipulation, something, or someone, intervenes in the mechanism of price setting, thereby taking unfair advantage at the expense of the rest of the investors.

Manipulation is an extremely serious action because it causes prejudice to the integrity of the financial markets and, in a particular manner, that of the stock market itself. The damage is done both by hindering clean play and by simultaneously blocking the meeting of institutional goals. In the case of the [Page 1323]financial markets, manipulation obstructs the effective mass ordering of shares on a totally equal basis, reducing in this way the financial market's goal of being a source of financing. As for the stock market, objective and impersonal price setting breaks down, thus frustrating the market goal of being a privileged indicator of the pace of the economy. When this happens, justice suffers and market efficiency is cut down.

Different ways of manipulating stock market quotations exist, but the most commonly used methods come to three: manipulation through quasi-monopoly, manipulation brought on by falsehoods, and manipulation by placing shares on the market above their real value. Following are a few relevant examples.

Suppose that a large bank controls several portfolio companies and it decides to use an important part of its own shares and a substantial amount of money in cash to dictate the quotation price of its shares. When market control has been obtained, the bank would be in favored position to buy back its own shares at a cutrate price by going through its subsidiaries. Once the price had gone up, they would sell them, making high profits at the cost of the investing public. This would be a case of manipulation by quasi-monopoly.

Another example along the same line is “muscle play,” which basically consists of taking advantage of a false oligopolistic position at a concrete moment. This muscle play aims at the creation of such a considerable price change that the losses resulting from creating this movement are less than the profits generated by the end result. There have been cases in which, in the last minutes of taking orders at a specific stock market, and at a moment of clear euphoria and a rising trend, a single operator made the index drop by more than 2%, with a large-scale operation. Although considerable losses occurred, the motive behind this apparently peculiar behavior became clear: A powerful institutional investor forced the index to drop so as not to face payments caused by the expiry of certain contracts made with another entity on the aforementioned index.

Manipulation through falsehoods can take a number of forms: false rumors; unfounded news of the impending crisis of a specific listed company; imaginary appointments, resignations, or contributions; false financial documents such as general balance sheets and past or future profit and loss accounts; supposedly expected profits or dividends; the discovery of mines, or granting of nonexistent patents for unreal inventions; and effective quotations. This last is the most efficient “rumor.” While it is assumed by the investing public that the publishable share price is correct, in reality it is the result of imaginary sales and purchases, of washed and matched sales. The motive behind this falsehood is to modify or produce changes with a frequency that in reality should not exist, but which benefit the image of the share in question.

...