What is Market Manipulation?

Market manipulation is a practice in which people engage in activities which interfere with the normal operations of a financial markets. Many nations have only a loose definition for market manipulation because it is sometimes difficult to point to specific manipulative behaviors, but people can still track manipulative activities and see the influence manipulation can have on the market. These practices are illegal in many regions of the world, although sometimes it can be difficult to distinguish between normal activity and market manipulation.

When people manipulate the markets, the activity impacts people involved with the commodities they manipulate, and it also harms the market as a whole. This makes it a matter of concern not just for individuals, but for the financial industry in general. When manipulation drives a stock value down in a bear raid, for example, other people who hold the stock lose because of the market manipulation. When market manipulation does something like creating an inflated market value, the market as a whole suffers and can even drag down the rest of the economy.

A wide range of activities could be considered market manipulation. Often, these practices require the cooperation of several individuals working together because few people have the clout to manipulate the market on their own. Some examples of manipulative practices including rapid buying and selling to make it look like there's lots of activity on a particular commodity, shortselling to drive prices down, withholding or adding supplies of commodities to control prices, and “ramping the market,” in which people try to push prices up.

The issue with market manipulation is that it creates an artificial picture which masks the true value of the commodity or group of commodities being manipulated. The manipulators can use this to their advantage to earn a profit, while people who are unaware of the manipulation and who make decisions based on the available information stand to lose, sometimes substantially, as a result of manipulation. In fact, manipulators count on this, often making a profit on the losses of others.

Suspected market manipulation can be investigated by financial regulators and other government officials. It may be prosecuted in a variety of different ways, depending on the nation and the nature of the behavior. The defense of activities deemed manipulative is often that they were normal, if slightly unethical, trading activities and that no specific intent to manipulate was involved on the part of the people who profited.