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.

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