What Is Manipulation?

Market manipulation refers to artificially inflating or deflating the price of a security or otherwise influencing the behavior of the market for personal gain. Manipulation is illegal in most cases, but it can be difficult for regulators and other authorities to detect, such as with omnibus accounts.

Manipulation is also difficult for the manipulator as the size and number of participants in a market increases. It is much easier to manipulate the share price of smaller companies, such as penny stocks because analysts and other market participants do not watch them as closely as the medium and large-cap firms. Manipulation is variously called price manipulation, stock manipulation, and market manipulation.

Key Takeaways

  • Manipulation is difficult to catch, but it's also difficult for the manipulator as the size of the market becomes larger.
  • Manipulation can be referred to as price, market, and stock manipulation.
  • Two common types of stock manipulation are pump and dump and poop and scoop.
  • Currency manipulation is the deliberate devaluing of a nation's currency by a government.

Understanding Manipulation

Manipulation takes many forms in the markets. One way people can deflate the price of a security is by placing hundreds of small orders at a significantly lower price than the one at which it has been trading. Investors get the impression that there is something wrong with the company, so they sell, pushing the prices even lower. Another example of manipulation is placing simultaneous buy and sell orders through different brokers that cancel each other out. This form of manipulation gives the perception, due to the higher volume, that there is increased interest in the security.

Two Types of Stock Manipulation

These false order techniques are often combined with the spreading of false information through online channels and message boards that other investors may frequent. The outside barrage of bad information combines with seemingly legitimate market signals to encourage traders to pile on or off a trade.

The pump and dump is the most frequently used manipulation to inflate a microcap stock artificially and then sell out, leaving later followers to hold the bag. The opposite of the pump and dump is the less common poop and scoop. The poop and scoop method is used less because it is harder to make a legitimately good company look bad than it is to make an unknown company look amazing. 

Currency Manipulation

Currency manipulation is a slightly different class of market manipulation, as only central banks and national governments can engage in it, and they are legal authorities in and of themselves. Being the owner of a currency legitimizes many of the actions these governments take to suppress or inflate their currency's value compared to its peers. Even though currency manipulation is not illegal, a country that is manipulating its currency may be challenged by other nations or punished through sanctions passed by its trading partners. Moreover, international bodies like the World Trade Organization (WTO) have been encouraged to play a stronger role in addressing accusations of currency manipulation 

Devaluation is the way to manipulate currency through the deliberate downward adjustment of the value of a country's money relative to another currency, group of currencies, or currency standard. The government issuing the currency decides to devalue a currency and, unlike depreciation, it is not the result of nongovernmental activities.

One reason a country may devalue its currency is to combat a trade imbalance. Devaluation reduces the cost of a country's exports, rendering them more competitive in the global market, which in turn, increases the cost of imports, so domestic consumers are less likely to purchase them, further strengthening domestic businesses. Because exports increase and imports decrease, it favors a better balance of payments by shrinking trade deficits. That means a country that devalues its currency can reduce its deficit because of the strong demand for cheaper exports.

Although currency manipulation is not illegal, different types of manipulation such as stock and market manipulation generally are illegal.

Example of Currency Manipulation

On August 5, 2019, the People's Bank of China set the yuan’s daily reference rate below 7 per dollar for the first time in over a decade. This, in response to new tariffs of 10% on $300 billion worth of Chinese imports imposed by the Trump administration, went into effect September 1, 2019. Global markets sold off on the move, including in the U.S. where the DJIA lost 2.9% in its worst day of 2019 to date. As a result, the Trump administration labeled China a currency manipulator.