For retail traders actively participating in the Indian stock market, the threat of market manipulation can significantly impact their trading decisions and overall portfolio performance. Understanding the signs of manipulation and learning how to navigate through volatile market conditions is essential for making informed trading choices.
In this blog post, we will explain the common tactics used by stock market manipulators and help you avoid falling victim to them.
What is Stock Market Manipulation?
Stock market manipulation is a type of fraud that involves deliberately interfering with the regular functioning of the stock market. Manipulators may try to create artificial demand for a stock, which drives up the price, or they may try to create artificial supply, which drives down the price. They may also try to artificially inflate or deflate stock prices through their fraudulent trades.
This deceptive practice often involves spreading false information or rumors, ultimately misleading investors and distorting market dynamics.
Different Types of Stock Market Manipulation
Pump and Dump Schemes
Pump and dump schemes are a type of stock market manipulation that involves artificially inflating the price of a stock through false or misleading statements, making gullible investors to invest in it. Once the price has been inflated, the manipulators sell their shares at a profit, causing the price to go down, leaving unsuspecting investors with significant losses.
Pump and dump schemes are a major problem in Indian markets, particularly among small-cap and mid-cap stocks. These stocks are more vulnerable to manipulation because they have lower trading volumes, less liquidity, and limited market analyst coverage.
Manipulators often use social media, messaging apps, and other online platforms to spread false or misleading information about a stock. They may claim that the company has a new product in the works, that it is about to be acquired by a larger company, or that it is poised for significant growth. In some cases, they may even create fake news articles or videos to support their claims.
Once the manipulators have created enough hype around the stock, they start buying shares in large quantities. This drives up the price of the stock, attracting even more buyers. Once the price has reached a certain level, the manipulators dump their shares and make a profit.
In 2022, SEBI fined several individuals and companies for their role in a pump and dump scheme involving the shares of Sadhna Broadcast and Sharpline Broadcast. The manipulators used YouTube videos to spread false and misleading information about the two companies, driving up their share prices. Once the prices had reached a certain level, the manipulators dumped their shares and made a profit.
How to avoid becoming a victim to pump and dump schemes?
- Be wary of any stock that is being hyped up on social media or in other online forums.
- Do your own research on any stock before you invest in it, and look for signs of a pump and dump scheme, such as a sudden spike in trading volume and price.
- Avoid investing in thinly traded stocks, which are more susceptible to pump and dump schemes.
- If you suspect a pump and dump scheme, sell your shares immediately.
It is a type of stock market manipulation insiders of a company like its employees, buy or sell shares of a company based on material information that is not yet known to the public. This gives insiders an unfair advantage over other investors, and it can distort the market and harm investors.
Directors, officers, and key managerial personnel of a company, promoters of a company, persons who have access to unpublished price-sensitive information about a company by virtue of their professional or official position are considered as insiders of a company.
There are many different ways that insiders can obtain material information. They may have access to confidential company documents, such as quarterly earnings reports or merger and acquisition plans. They may also learn about important events, such as new product launches or regulatory changes, before the public does. Once insiders have material information, they can use it to make profitable trades.
SEBI, fined two entities, Sushil Patwari and Nagreeka Capital and Infrastructure Ltd (NCIL), a total of Rs 20 lakh for insider trading violations in the shares of Rupa and Company Ltd (RCL). The investigation, conducted between February and June 2021, revealed trading while in possession of unpublished price-sensitive information (UPSI) related to RCL’s financial results for the quarter and year ending March 2021.
How to avoid becoming a victim of Insider Trading?
- Be skeptical of any investment advice that you receive, especially from people who have access to non-public information.
- Pay attention to the trading volume and price of a stock, and be wary of any sudden and unexplained changes.
- If you suspect insider trading, report it to SEBI.
Spoofing is a sneaky trick used in the stock market where people place fake orders, but they don’t actually plan to follow through with them. These fake orders make it seem like there’s a big demand or supply for a stock, which then makes the stock price go up or down. Once other investors react to these fake signals, the tricksters cancel their orders and leave the other investors with losses.
This kind of trickery, called spoofing, has become more common in Indian markets, especially as more trading is done electronically. With electronic trading, it’s easier for the tricksters to place and cancel orders quickly without anyone knowing who they are.
Spoofers usually go after small and mid-sized companies’ stocks, which are easier to manipulate because they aren’t traded as much and there isn’t as much money available. They might also choose stocks that are going up and down a lot because these are the ones that will react the most to their fake signals.
Spoofing messes with the stock prices, makes it hard for investors to make good decisions, and can even make it harder for people to buy and sell stocks. So, it can create a lot of problems in the stock market.
In April 2023, SEBI found that Nimi Enterprises was placing large orders without the intention of executing them, in order to create the appearance of demand calling out this practice of spoofing a harm to other investors by giving them a false impression of the market. SEBI ordered Nimi Enterprises to cease trading for two years.
How to avoid becoming a victim to spoofing?
- Be aware of spoofing and its red flags, such as large orders that are placed and quickly canceled.
- Avoid trading in thinly traded stocks, which are more susceptible to spoofing.
- Use limit orders instead of market orders when buying or selling stocks.
- If you suspect spoofing, report it to your broker or to SEBI.
Tricky tactics like pump and dump schemes, insider trading, and spoofing can mess with your investments. How to stay safe? Be skeptical of sudden market hype, do your own research, and report anything fishy to SEBI.
By staying informed and cautious, you can invest in the stock market like a pro and protect your hard-earned money. Stay sharp and invest smart!
Yes, stock market manipulation can distort market dynamics and harm investor confidence, impacting the overall financial stability of the economy.
SEBI employs various surveillance systems and algorithms to monitor trading activities, track unusual price movements, and investigate suspicious trading patterns to detect potential cases of market manipulation.
Yes, individuals or entities found guilty of market manipulation face penalties, fines, and legal consequences as per the regulations laid out by SEBI and other relevant authorities in India.
Investors should immediately report any suspicious activities or market manipulation concerns to SEBI, their broker, or the relevant regulatory authorities to ensure timely intervention and investigation.
Market manipulation can contribute to increased market volatility, erode investor confidence, and create an environment of uncertainty, making it challenging for investors to make well-informed investment decisions.