Stock markets are better regulated today than in the 19th century, but market manipulations by large investors — insiders who are hidden because they have to keep their presence a secret — still occur in all stock exchanges around the world. Only the blatant cases make it into press. For instance, in August 2004, Citigroup sold more than 200 different Euro-zone bond series in the space of 2 minutes. See Note 1.
After the price fell, they bought it all back again at a lower price and netted around 15 million Euros in profit. This came to press because they were heavily scrutinized by market authorities — their rapid short selling substantially restricted market liquidity, causing major problems for other investors.
A U.S. Note Corner
In May 1991, a bond trader at Salomon Brothers was discovered attempting to corner the market in two-year U.S. Treasury notes. During the 1990’s bull market, numerous price manipulation schemes for penny stocks — stocks trading under $5 per share — were discovered by the SEC.
In 2002, China’s worst stock-market crime was a scheme to manipulate the share price of a firm called China Venture Capital. Seven people, including two of the firm’s former executives, were accused of using $700 million and 1,500 brokerage accounts nationwide to manipulate the company share price upward. The copper futures market was manipulated upward by a supposedly rogue trader at the Japanese trading firm Sumitomo — at least the official position of the company is that the trader was acting on his own as a rogue.
These are just the cases that have hit the press. Manipulators do everything possible to stay hidden from the public. If they restrict their buying and selling to the long-term, they are really hard to detect because nothing the public pays attention to stands out as unusual. Because of this, the empirical literature in finance regarding this subject is very limited. The widespread manipulation through stock pools, the forerunners of today’s mutual funds, before the crash of 1929 is vividly documented by Harvard economist John Kenneth Galbraith.21 Pump-and-dump schemes — slang for stock price cornering manipulations — usually in nano-cap stocks today— have also been detected in small markets like Pakistan. See Note 2.
– Doc Brown
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
NOTE 1: Eurobonds are issued in the geographic area comprising the European Union countries using the euro as a monetary unit.
NOTE 2: Khwaja, A., and A. Mian, 2004, “Unchecked Intermediaries: Price Manipulation in an
Emerging Stock Market,: Journal of Financial Economics, forthcoming.
SURVIVAL RULE: Stocks become targets for cornering when there is bad news about a good company and prices stay low — when nobody you know is paying attention.
FURTHER READING: Galbraith, John K., 1972, The Great Crash, 1929, Boston: Houghton Mifflin Company.
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