What is Market Manipulation?

The traders aren't the target. They are just collateral damange.

Traders often come across the concept of market manipulation and believe that somebody's out there to get them. A lot of traders believe that they lose money because of market manipulation. And a lot of times they come up with solid proof of market manipulation. If not manipulation, they lose to inefficient broker terminals which they also call manipulation.

Let's address the elephant in the room – does market manipulation exist? Yes it does.

So, what is market manipulation? In simple terms, manipulation is when someone influences the price of a financial asset such as stock or commodity through deceptive means. But it's more nuanced than most traders think. The manipulators aren't usually gaming individual traders, they are trying to game the whole system. They are always on the lookout for systemic vulnerabilities and aim to exploit those.

A trader getting deceived is not intentional. It's collateral damage. There are many ways demand and supply can be influenced. The prominent ones are pump and dump, spreading false information, coordinated trading and spoofing.

Pump and dump is most popular where the manipulator creates artificial hype, inflating the stock price to a point where retail ownership is at maximum. Then he offloads all of his holdings at an attractive price. Even if the stock continues to fall, the manipulator will still get out with handsome profits.

The moves are so explosive that an inexperienced trader would get greedy and invest their money in it. This usually happens in penny stocks and cryptocurrencies. Not every low market cap stock that gives explosive moves is manipulated though, some are authentically growing but it is the ability to differentiate between the two that is the key. Liquidity is generally a good way to avoid stocks that are easy to manipulate.

Spreading false information, although less common, is still one of the ways in which a stock can be manipulated. It happens with many stocks including large caps. One example that comes to mind is Kotak Bank. Somebody spread the news that Warren Buffet's Berkshire Hathaway is looking to invest in the bank. The stock rallied 10% on that day, taking the entire sectoral index and primary index with it. The next day the bank had to clarify that it was false news and the stock plunged.

It is one of the most effective and least risky methods to implement from a manipulator's point of view. Anybody can give anonymous tips to media channels or large institutions. The retail trader who likes to trade on big moves is always on the lookout for such tips. Sadly, there's no systemic way to avoid it. The only way to do it is by controlling your impulses. Don't trade a move that is not part of your setup.

Coordinated trading has been on the rise in the past few years. It's so ridiculously simple that it baffles me. All you need is a big group maybe on Telegram or other social channels. You need a small enough stock with low liquidity and you need a mass of gullible people who are eager to jump at your word. You can artificially drive the demand up and make handsome profits.

Another way of coordinated trading is placing large orders from a trading institution or trading desk, implying to other traders that there is a lot of demand or panic selling in the market. People follow suit and soon we have a big trend at hand.

Such moves frustrate the trader and trigger them to make bad decisions in the market which they end up regretting later. The suddenness is their weapon. So the only way to avoid being trapped in such manipulation is by trusting your setup and having faith in your system. Do not get deterred from a few losses. Don't make decisions that can blow your account.

A more advanced version of coordinated trading is spoofing but there's a twist. You need sophisticated systems and technology to execute it. Or not. Because unlike other methods, in spoofing there is no real trade, only the illusion of big demand. The manipulator, let's say, places a large buy order for a stock at a price that is closer to the actual price. People who look at the order book think there's huge demand. The institutions are interested. So they keep buying, inflating the price of the stock.

Now, the purpose of this act is to sell at a better price. Either selling their existing position or creating a fresh short position. Assuming a 100 rupee stock moves to 102 due to suspected demand, the manipulator creates a short position at that price and removes the old order before the price could trigger their order.

This method is risky because the fake order has to be closer to actual price for it to reflect in the order book and appear authentic. You need solid tech to ensure the order never gets triggered, lest you would lose a lot of money. This is easier to avoid in comparison. Only focus on the end of day data. But if you are focused on tracking the order book then observe the succeeding move closely. If the demand didn't translate into a move, exit the stock.

Almost all the manipulation problems can be avoided if you focus on your setup, trade stocks with good liquidity, avoid impulsive trading and follow a process that you fully understand. All of trading is just that. All of your psychology, trading techniques and trading wisdom comes down to strengthening these pillars.

Your quest shouldn't be to discover whether market manipulation exists. It should be building a strong trading foundation with which you can save yourself from any kind of manipulation. Market manipulations do not last for long. They are always instant and done with that intention. But your trading system, if it's good enough, will last you longer.