Do traders, market makers, specialists or others ever deliberately drive a stock's price down to "shake out" the last sellers?

By Casey Murphy AAA
A:

Many individual investors have had the experience of closing their position in a stock only to see the price rebound moments later. When this happens, it may lead the investor to believe that the price was manipulated, and this in turn raises questions like this one.

According to Section 9 of the Securities Exchange Act of 1934, it is unlawful for one or more persons to effect "a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others". With the invention and popularity of level II quotes, it is possible that a group of traders can see where a surplus of buy or sell orders is located, but as Section 9 makes clear, the manipulation of a security's price for the purpose of inducing purchase or sale of the security is illegal. An example of such market manipulation would be the practice known as "ghosting".

Stock exchanges such as the NYSE are required to enforce the provisions of the Securities Exchange Act of 1934, which cover not only market manipulation but also other matters such as misconduct on the trading floor, insider trading, customer-related sales practice violations and other types of abusive trading practices.

To learn more about market regulation, see Policing The Securities Market: An Overview Of The SEC.

RELATED FAQS

  1. Does identity theft or credit card fraud also occur with cash-on-delivery?

    Understand the process of cash on delivery (COD) as well as where identity theft and fraud may occur and some techniques ...
  2. What methods are used to launder money?

    Learn about the methods that criminals use when they are looking to launder money. Many different methods are used, and they ...
  3. What's the difference between a capital market and the stock market?

    Learn about the differences between stock market and capital market. Identify several important stock markets and understand ...
  4. If caught, what implications does money laundering have on a business?

    Understand the damaging effects of money-laundering on businesses as well as anti-laundering measures businesses can use ...
RELATED TERMS
  1. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  2. Financial Action Task Force (FATF)

    An intergovernmental organization that designs and promotes policies ...
  3. Bulldog Market

    A nickname for the foreign bond market of the United Kingdom. ...
  4. Banker Trojan

    A malicious computer program designed to gain access to confidential ...
  5. Float Shrink

    A reduction in the number of a publicly traded company’s shares ...
  6. Capital Strike

    A refusal of businesses to invest in a particular sector of the ...

You May Also Like

Related Articles
  1. Investing News

    Will Bitcoin And Walmart Force Western ...

  2. Active Trading

    What Is A Pyramid Scheme?

  3. Trading Strategies

    What Is The Difference Between After-Hours ...

  4. Investing Basics

    How Effective Is The Chinese Wall?

  5. Investing News

    Fact Sheet: What Is The Fortune 500 ...

Trading Center