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. What's the difference between primary and secondary capital markets?

    Learn how in the primary capital market, securities are issued for the first time, while in the secondary market, investors ...
  2. Are secondary capital markets beneficial for society, or are there purely speculative?

    Learn why secondary bond markets are essential for both the capital market and economy. Explore the reasons they must be ...
  3. What's the difference between legal defalcation and illegal defalcation?

    Discover what is meant by the term ''defalcation'' and how it can be used in multiple contexts to describe illegal or legal ...
  4. What exactly is being done when shares are bought and sold?

    Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange ...
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. Economics

    America's Most Notorious Corporate Criminals

  2. Investing Basics

    How Are Interest Rate Swaps Valued?

  3. Investing News

    Educating Your Clients About Cybersecurity

  4. Investing News

    How The Patriot Act Works & Why Is It ...

  5. Economics

    An Introduction to Government Loans

Trading Center