What Is Ghosting?
Ghosting is an illegal practice whereby two or more market makers collectively attempt to influence a stock's price. Corrupt companies use ghosting to affect stock prices so they can profit from the price movement. This practice is illegal because the law requires market makers to compete.
- Ghosting is an illegal way market participants attempt to manipulate the price of a stock, driving it either lower or higher.
- With ghosting, two or more market makers who are supposed to compete with each other team up to create a buying or selling frenzy surrounding a particular stock.
- Ghosting can be hard to detect, and thus hard to regulate, although the laws regarding it are similar to those regarding insider trading.
- Ghosting can wreak havoc on a variety of stocks and sectors, as the artificial spike or plunge of one particular stock can impact many others, as well.
How Ghosting Works
When ghosting the market, more than one firm may attempt to drive a buy or sell frenzy. Companies often initiate fraudulent activity by having several parties buy or sell large amounts of stock. This sudden increase in activity often sparks similar activities in other stockholders who are unaware of the collusion. As a result, prices rise or fall dramatically, corresponding to the buying or selling frenzy, respectively.
The industry calls this ghosting because, like a spectral image or a ghost, this collusion among market makers is difficult to detect. In developed markets, the consequences of ghosting can be severe.
Companies can use ghosting to either drive a stock up or down, depending on the desired outcome. There must be a minimum of two participants involved, and those included are generally conspiring together. The goal is mutually beneficial as those involved are looking to capitalize on the change in price for personal gain.
Due to current laws and regulations, it is illegal for two firms to coordinate an event to manipulate the market. By function, market makers must be competitors and the law requires them to act as such. Ghosting is illegal for reasons similar to those governing insider trading because both provide investors with an unfair advantage within the marketplace.
Ghosting vs. Insider Trading
While both ghosting and insider trading give particular firms or investors the ability to profit through illegal mechanisms, they function differently. With ghosting, the actors manufacture a change in the market condition by the sudden increase of buying or selling of a stock. This causes stock prices to rise or fall in response to the sudden increase in trade volume for disingenuous reasons as no event has transpired to instigate the change.
Insider trading gives those competitive firms informed of an upcoming event an unfair advantage, allowing them to buy or sell the corresponding stock before the public learns the new information. The inside information can come from company employees or any third party with knowledge of the inner workings of an organization. The recipient of this insider information is barred from using that information for gain.