DEFINITION of '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.

BREAKING DOWN 'Ghosting'

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 Versus 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 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 and is barred from using that information for gain.

Process Involved in Ghosting

When ghosting the market, more than one firm may attempt to drive a buy or sell frenzy. Companies often start fraudulent activity this by all parties buying or selling large amounts of a 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.

RELATED TERMS
  1. Insider Information

    Insider information is a non-public fact regarding the plans ...
  2. Insider Buying

    Insider buying is the legal purchase of shares by a senior executive ...
  3. Insider

    An insider is a director or senior officer of a company, as well ...
  4. Tip From A Dip

    A tip from a dip is advice from a person who claims to have inside ...
  5. Pac-Man Defense

    The Pac-Man defense is a defensive tactic used by a targeted ...
  6. Inside Sales

    Inside sales is the sale of products or services by personnel ...
Related Articles
  1. Insights

    Should Insider Trading Be Legal?

    Insider trading has become a hot-button issue. Here are some of the pros and cons to making it legal.
  2. Trading

    Defining Illegal Insider Trading

    The better you understand why insider trading can be criminal, the better you'll understand how the market works.
  3. Investing

    How Insider Trading Is Prevented in Corporations

    Insider trading can undermine the markets and damage reputations, so companies and regulators alike have instituted policies and actions to prevent it.
  4. Trading

    Can Insiders Help You Make Better Trades?

    Find out why the trading activity of owners and executives can be a valuable trade-confirmation tool.
  5. Investing

    When insiders buy, should investors join them?

    Insider trading activity can inform your investment strategy, but it requires research and a level head. Here's what to look for as insiders buy and sell.
  6. Insights

    Why Insider Trading Is Bad for Financial Markets

    Insider trading can come in many forms — some of them even legal — with the benefits and costs often debated by practitioners and academics alike.
  7. Investing

    How to use insider and institutional ownership

    Learn why insider and institution stock ownership reveal much information about the stock. Understand what to consider when making well-informed investment decisions.
  8. Financial Advisor

    Company Insiders Aren’t Buying Stock: Should You?

    Purchases of company stock by insiders is on the decline. Is this a warning sign?
  9. Managing Wealth

    3 Abandoned Towns for Sale Under $1 Million

    For as little as $250,000, you can buy your own abandoned town. These three forgotten towns offer endless possibilities for adventurous investors.
  10. Investing

    Role Of A Market Maker

    A market maker is a firm or an individual that stands ready to buy and sell a particular security throughout the trading session to maintain liquidity and a fair and orderly market in that security. ...
RELATED FAQS
  1. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Answer >>
  2. What's the difference between a Nasdaq market maker and a NYSE specialist?

    What's the main difference between a specialist and a market maker? Not much. Both the New York Stock Exchange (NYSE) specialist ... Read Answer >>
  3. How does revenue sharing work in practice?

    Find out how revenue sharing works as profits are distributed among associated business partners. Learn how revenue sharing ... Read Answer >>
Trading Center