What is Market Manipulation?

Besides facilitating the transfer of stocks, currencies, futures, and other financial instruments between buyers and sellers, a basic function of financial markets is to allow participants to communicate information to one another about their subjective view of a particular instrument’s price. If a trader is willing to place an actionable offer to buy a Treasury futures contract for $X, for example, she is implicitly signalling to the market that, in her view, the contract is worth approximately that amount (at least insofar as buying it at that level relates to her overall position and trading strategy).

“Manpulation definition - The term ‘manipulation’ may, in short, be applied to any practice which has as its purpose the deliberate raising, lowering or pegging of security prices. Buying and selling in themselves do, or course, affect price, but in a free and open market this is a natural consequence and not their pre-conceived purpose. Manipulation leads to an artificial and controlled price. Such a price, which is broadcast in the form of a market quotation, then, does not reflect an independent appraisal of the security in respect to the floating supply, nor to the immobile holdings throughout the country.”5

By centrally aggregating the pricing opinions of many individual traders and investors, financial markets allow buyers and sellers to reach a rough consensus on an asset’s current market value (i.e., the approximate midpoint between supply and demand at any given moment). In this way, markets allow an asset’s price to be “discovered” through the transmission of the prices at which various buyers and sellers are willing to transact which, in turn, presumably reflect the proprietary analyses of those buyers and sellers about an asset’s value. As the US Supreme Court described this phenomenon, “[W]ell developed markets are efficient processors of public information. In such markets, the ‘market price of shares’ will ‘reflect all publicly available information.’”¹ In other words, “The idea of a free and open public market is built upon the theory that competing judgments of buyers and sellers as to the fair price of a security brings about a situation where the market price reflects as nearly as possible a just price.”² For a market’s price discovery mechanism to function properly, of course, investors must have faith in the integrity of the pricing information transmitted by their fellow market participants.³

Within this framework, market manipulation can be understood as any act which “obstructs the operation of the markets as indices of real value.”⁴ As two prominent law professors analysing the market activity that helped bring about the Great Depression put it:

“The methods and techniques of manipulation are limited only by the ingenuity of man. The aim must be therefore to discover whether conduct has been intentionally engaged in which has resulted in a price which does not reflect basic forces of supply and demand.”
 -- Cargill v. Hardin, 452 F.2d 1154, 1163 (8th Cir. 1971)

Regulators and courts in the U.K. have described market manipulation as it is understood under English law as being comprised of three elements:

1. “financial dealings that provide fictitious indicators to obtain the price of a monetary tool at a synthetic level”.
2. “a series of contracts or orders to utilise fabricated devices or products”.
3. “sharing and dispersal of information that provides false or misleading signals”.⁶

While these concepts are relatively easy to grasp in theory, market overseers have struggled to define exactly what separates lawful from unlawful market conduct. As such, the law relating to market manipulation has largely evolved on an ad hoc basis, with interpretations as to what is permissible and what is not changing over time. Because “[s]ophisticated economic justification for the distinctions made in this area of the law may at times seem questionable,” observed the US Seventh Circuit, “Sometimes the ‘know it when you see it’ test may appear most useful.”⁷ The unpredictability of this subjective approach creates obvious problems for market participants. Complicating matters further is the fact that the means by which manipulation can be accomplished are getting more complicated. The increasing interconnectedness of global markets and the involvement of algorithmic traders expand the opportunities for market manipulation and makes detecting and investigating it more difficult. For example, many recent market enforcement actions have involved manipulation in one jurisdiction by persons physically located elsewhere, or transactions in one market designed to manipulate the prices in another.

As regulators try to keep pace with a moving target, financial institutions, traders, and investors risk having their strategies—even those that might be commonplace—called into question after the fact. One need look no further than the recent FX, Libor, and spoofing prosecutions for examples of market participants being selectively penalized for engaging in widespread, ostensibly accepted market practices. To prepare for possible regulatory scrutiny, it is essential for traders, compliance professionals, and defense counsel to remain current on the regulatory frameworks applicable in each of the jurisdictions in which they, or their companies and clients, are active. The purpose of this primer is to provide an overview of the market manipulation regulations in two of the world’s largest and most active markets: the United States and United Kingdom. 

A Primer on Market Manipulation Regulations in the U.S. and U.K." by Rahman Ravelli.

Chapter.1 - What is Market Manipulation?
Chapter.2 - Market Manipulation under Federal US Law.
Chapter.3 - Market Manipulation in the UK.
Download the complete PDF guide .

• 1 Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S. 455, 461 (2013).
• 2 Basic Inc. v. Levinson, 485 U.S. 224, 246 (1988) (citing H.R. Rep. No. 1383, at 11).
• 3 See Schlanger v. Four-Phase Systems Inc., 555 F. Supp. 535, 538 (S.D.N.Y. 1982) (“It is hard to imagine that there ever is a buyer or seller who does not rely on market integrity. Who would knowingly roll the dice in a crooked crap game?”); see also Basic, 485 U.S. at 247 (“An investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price.”)
• 4 Basic, 485 U.S. at 246; see also U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150, 222-23 (1940) (“[M]arket manipulation in its various manifestations is implicitly an artificial stimulus applied to (or at times a break on) market prices, a force which distorts those prices, a factor which prevents the determination of those prices by free competition alone.”); Santa Fe Industries v. Green, 430 U.S. 462 476 (1977) (“[M]anipulation is ‘virtually a term of art when used in connection with securities markets” and “refers generally to practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity.”); Gurary v. Winehouse, 190 F.3d 37, 45 (2d Cir. 1999) (“The gravamen of manipulation is deception of investors into believing that prices at which they purchase and sell securities are determined by the natural interplay of supply and demand, not rigged by manipulators.”); In re Barclays Liquidity Cross & High Frequency Trading Litig., 126 F. Supp. 3d 342 (S.D.N.Y. 2015) (manipulation transmits “a false pricing signal to the market” that does not reflect the “natural interplay of supply and demand”); Wilson v. Merrill Lynch & Co., 671 F.3d 120, 129-30 (2d Cir. 2011) (manipulation “connotes intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities”).
• 5 James Wm. Moore and Frank M. Wiseman, Market Manipulation and the Exchange Act, 2 U. CHI. L. REV. 46 (1934-1935).
• 6 Ester Herlin-Karnell and Nicholas Ryder, Market Manipulation and Insider Trading (New York: Hart Publishing, 2019), at 2.
• 7 Frey v. CFTC, 931 F.2d 1171, 1175 (7th Cir. 1991).