Market manipulation

In simple terms

Share prices are meant to reflect what buyers and sellers, each using public information, are willing to do. Market manipulation is any deliberate attempt to distort that: to create a false impression of demand, supply or price, or to profit from information that others cannot have.

India prohibits manipulation through SEBI's regulations on fraudulent and unfair trade practices, and insider trading through separate regulations. The forms differ, but the victims are always the same: ordinary investors who trade on what looks like genuine market activity.

The main forms

Circular trading and wash trades. A group of related accounts trade the same shares back and forth. The trades are real on the exchange's records, but ownership hardly changes. The point is to make a share look active and in demand.

Ramping and pump-and-dump. Prices are pushed up by buying and by spreading false or exaggerated news, often through tip groups and social media, so that the manipulators can sell to the buyers they attracted. The pump-and-dump lesson covers this in detail.

Spoofing and layering. A trader places large buy (or sell) orders they do not intend to let trade, to make demand look stronger than it is. Others react by buying; the spoofer sells to them and cancels the large orders before they can be filled.

Front-running. Someone who knows a large order is coming, for example a dealer handling a fund's order, trades ahead of it to profit from the price move it will cause.

Insider trading. Trading while in possession of unpublished price sensitive information, such as results, a takeover or a large order not yet announced, or passing it on to others who trade. It is unfair because the other side of the trade cannot know what the insider knows.

False or misleading news. Spreading rumours or fabricated stories to move a price, whether through fake announcements, doctored documents or coordinated posts.

Marking the close. Placing trades near the end of the day to push the closing price up or down, which can affect valuations, index levels and the next day's price band.

How circular trading creates volume

Insider trading: who it covers

Insider trading rules cover more than company directors. Anyone who has unpublished price sensitive information, a relative, an auditor, a banker, or a friend who was told in confidence, can be treated as an insider. So if someone offers you "inside information" about a company's results before they are announced, trading on it could make you part of the offence, not just a lucky recipient.

Companies also limit when their own staff and directors may trade, and must announce price sensitive information to the exchanges promptly, so that everyone receives it at the same time.

How manipulation is detected

Exchanges run surveillance systems that watch every order and trade for patterns: repeated trades among the same accounts, orders placed and cancelled to move prices, sudden volume spikes in little-traded shares, and trading just before important announcements. Shares showing unusual activity can be moved into stricter surveillance, such as trade-for-trade settlement or narrower price bands.

SEBI investigates suspected cases using trading records, phone and message records and links between accounts. It can bar people from the market, order them to give up unlawful gains, impose penalties and refer cases for prosecution.

Why it matters

Manipulation is designed to fool exactly the signals beginners rely on: rising prices, heavy volume, confident tips and "news". Knowing how those signals can be manufactured is a defence. It also explains why some of the rules you meet, such as price bands, surveillance measures and disclosure requirements, exist at all.

Limitations

Detection is not prevention. Investigations take time, and money lost to manipulators is often not recovered. Not every unusual price move is manipulation, either: genuine news, index changes or large legitimate orders can move prices sharply. This lesson describes the main patterns; the legal definitions are set out in SEBI's regulations.

Common mistakes

• Believing manipulation only happens in tiny companies. It is easier in small, thinly traded shares, but insider trading, front-running and spoofing have been found in large, liquid ones too.
• Reading high volume as proof of genuine interest. Volume can be manufactured.
• Treating "inside information" as an opportunity. Trading on it can be illegal for you too.
• Buying because a share keeps hitting its upper circuit with no news. That pattern is common in manipulated shares.

Try it yourself

1. Find a small company whose share price has risen sharply over a month. Check the company's announcements on the NSE or BSE website. Is there news that explains the move?
2. Compare the share's recent daily volume with its volume a few months earlier.
3. Check whether the exchange has placed the share under any surveillance measure; exchanges publish these lists.
4. Write down what an outsider seeing only the price and volume would have concluded.