In Finance, what is Ghosting?

Ghosting, in financial circles, is an unethical and usually illegal strategy in which two or more market makers try to bring about changes in the price of a particular stock. The attempt may be aimed at driving down the price of the shares, or causing the value of the shares to artificially inflate for a period of time. Many countries around the world have specific laws that prohibit ghosting, with the penalties for breaking those laws ranging from fines to periods of imprisonment.

The process of ghosting normally requires a minimum of two partners in order to be effective. One market maker, who may be a business or an individual, will work to push the stock up or down, depending on the desired outcome. This may be accomplished in a number of ways, usually by manipulating information that makes it appear as if the price is migrating in response to prevailing market conditions, or the condition of the company that issues the stock. At the same time, the second partner will employ similar methods involving the same stock, often using strategies that either obscure the efforts of the first partner, or enhance the results of the actions taken by the first partner.

The name for this unethical and often illegal practice comes from the fact that everything is done in a clandestine and seemingly intangible manner. The general public, which includes the bulk of investors, is unaware of who is manufacturing this artificial change in the value of the shares involved. Since the money makers will go to great lengths to remove any evidence that points to them as being involved in a price fixing scheme, their presence in the strategy is much like that of a specter – hard to detect and even harder to implicate in the recent shift in the value of the stock.

Ghosting is considered unethical because it violates the basic tenet of investing that assures reasonable competition among all money makers in the marketplace. When the value of a given stock is tampered with, either to increase the value or drive down the value and cause investors to begin selling off the stock for less than the actual worth, it is impossible for investors to make decisions based on real information. As a result, the ability of the majority investors to earn a return for their efforts is compromised, while a select few are in a position to profit from the price fixing.

Being convicted of ghosting can have serious consequences. Depending on the nature of local laws, the market makers involved may be subject to heavy fines, prevented from being involved in the stock market for a period of time, or even face criminal prosecution. Many countries around the world see ghosting as a threat to the economic well being of not only their individual nations, but also a potential threat to the world economy. As a result, there are few countries left in the world that do not have specific regulations against this type of activity.