What is market manipulation?
Simply speaking, market manipulation is the conducting of market activities to interfere with the actual supply and demand of securities or derivatives so as to create a false or misleading appearance of the price or turnover of the securities or derivatives.
This can be done by creating a false or misleading market by driving up, suppressing or stabilising the price of the securities in question. They may also mislead investors by creating the appearance of active trading of the securities through transactions in which a person buys or sells securities without a change of beneficial ownership in the transaction, ie. wash sales.
How can market be manipulated?
Market manipulation tactics include:
- The release of false or misleading information.
- The taking up of wash sales from one another within a certain trading period to increase the turnover of the stock or distort the actual share price.
- The placing of purchase orders at slightly higher prices or sale orders at lower prices to drive up or suppress the price of the securities when the market just opened, ie. "marking the open".
- The drying up of stocks supply to exert undue upward price pressure on the stocks. This is known as "cornering shares".
What are the penalties for market manipulators?
Market manipulators will be subject to severe punishment. Starting from 1 April 2003, the parallel civil and criminal regimes under the Securities and Futures Ordinance enable the SFC more effectively to combat market misconduct like market manipulation. A Market Misconduct Tribunal (MMT) has been set up to handle civil cases of all forms of market misconduct including market manipulation, insider dealing and the dissemination of false and misleading information about securities or futures contracts. The MMT will decide cases on the civil standard of proof and can impose a range of civil sanctions such as ordering the disgorgement of profits, "cease and desist" and "cold shoulder" orders, and disqualifying a person from directorship or management of a company.
On the other hand, offenders will be prosecuted where there is sufficient evidence for a criminal prosecution. If convicted, the market manipulator may be subject to imprisonment for a period of up to 10 years and a fine of up to HK$10 million.
Any SFC licensee found to have taken part in market manipulation may have their licence suspended or revoked.
How can investors avoid from suffering losses due to market manipulation activities?
- Do not follow the herd, or trade on rumour
Market manipulators usually stock up on the target securities and use various tactics to drive up their prices before offloading them to take profits. If investors only make their investment by following others blindly, they may have unintentionally added to the effects of a manipulation started by a ramper.
- Do your homework before investing in a stock
Investors may also suffer losses for the securities they buy at a high price when the market manipulators stop pumping up the price because there will be very little real demand for the securities. Investors should gather sufficient, credible information and do their homework before investing in a stock. This includes:
- pay attention to the price history and liquidity of the stock, because historical share prices and liquidity are always better indicators of value than recent movements;
- read the official announcements of listed companies. Companies are obliged to make disclosures regarding share concentrations. When such announcements are made, investors should exercise caution if tempted to buy a rising stock;
- think carefully when purchase a rarely traded stock as it may be difficult to sell at a satisfactory price;
- study the fundamentals of the stock and make analysis and comparison so as to assess its intrinsic value. Factors to be considered in making an analysis include profit, P/E ratio, dividends, book value and liquidity, etc.