科普贴 Identifying and Eliminating Market Manipulation# Stock
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Neil McGovern
Voices, April 9, 2012
Exchanges are inherently invested in identifying and eliminating market
manipulation. One of the major goals for an exchange is to ensure ‘fair
play’ in their markets.
Providing an environment in which all participants uphold market rules
results in more liquidity, better spreads and more activity for the exchange
. Exchanges that successfully cultivate such environments are more
attractive to law-abiding traders than exchanges that do not.
Additionally, letting market manipulation continue within an exchange can be
costly. A Journal of Financial Economics study of an emerging market
highlights the costs of market manipulation directly.
McGovern
Asim Ijaz Khwajaa of Harvard University and Atif Mianb of the University of
Chicago examined data from the Securities and Exchange Commission Pakistan (
SECP). They found that annual rates of return were 50 to 90 percentage
points higher when brokers traded on their own behalf versus returns earned
by outside investors. Neither market timing nor liquidity provision by
brokers could explain this.
The authors found evidence of “pump and dump” price manipulation, which
accounted for up to half of a broker’s earnings. Large rents such as this
explain why emerging markets struggle to build volume.
Because of this, emerging markets often need to counteract market
manipulation with good, highly visible market surveillance coupled with
strong, well enforced regulations. These are powerful deterrents against “
pump and dump” and other illegal practices. For example, when TurkDEX
sought to establish a comprehensive trading system to detect abusive trading
patterns at high-speed market rates, it installed complex event processing
(CEP) software as its platform to speed the development and deployment of
its surveillance applications.
There are many types of behavior that can be categorized as market
manipulation and emerging markets need to be aware of the key types to
monitor for, including:
• Insider trading: Trading on material data that is not known to all
participants in the market. The classic example is illegally trading on
merger and acquisition data that moves a stock price significantly.
• False or misleading transactions: Disingenuous trades
deliberately intended to deceive other traders. “Wash trades,” for
instance, occur when an unscrupulous investor simultaneously buys and sells
a single instrument to increase its activity, potentially signaling that
there is material news imminent. ”Painting the Tape,” trading between
investors, also artificially increases the activity levels for an instrument.
• Price positioning: Altering the end-of-day price. ”Marking the
Close,” when a trader makes the last trade of the day at a price
significantly different from the current price, allows market-on-close
orders to be executed at a price that is advantageous to the manipulator or
accomplices. This can be especially damaging on an expiration Friday or an
index rebalancing day. Another variant of price positioning is the abusive
squeeze, whereby a person with significant control over the supply and
demand of a product engages in behavior to corner the market with the aim of
positioning the price of that product at a distorted level.
• Fictitious Devices: Buying or selling after erroneous news moves
an instrument’s price. ”Pump and Dump” schemes attempt to boost the price
of a stock through misleading statements so the perpetrators sell their
positions at the peak of the hype cycle. This practice is popular in smaller
exchanges and smaller stocks where the price can move quickly and
dramatically on material news. ”Trash and Cash” circulates bad news about
a stock, lowering the price so a trader can buy below fair market value.
A combination of several approaches is necessary to address market
manipulation and increase market trust in 2012 and beyond. New technologies
that can monitor all market activities in real time, including the options
streams, can identify potentially abusive behavior and flag it for
investigation. The challenge of identifying these behaviors across execution
venues needs to be addressed both at the national and international level.
Stephen Luparello, vice president of FINRA, has proposed several principles:
• Comprehensive surveillance. The regulatory structure should
provide a holistic approach to regulation, where regulators can monitor and
detect problematic activity across products (e.g., equity, debt and
derivatives) and not just within each market and market segment.
• Fine-grain information. The structure should guarantee sufficient
granularity and aggregation of audit trail data across markets and
financial products so that regulators can readily identify activities --
such as direct market access, high frequency trading and algorithmic trading
, among others -- and better design surveillance systems to detect market
manipulation and other abusive strategies.
• Openness. The structure should ensure that audit trail data is
transparent so that market participants’ trading activity is discernable to
regulators. It must also prevent participants from masking their identity
by using multiple identifiers or the identifiers of another broker-dealer.
Basically, knowledge is power. The more transparent and standardized we make
market data, the more power everyone will have -- making it tougher for
manipulators to survive and thrive.
Voices, April 9, 2012
Exchanges are inherently invested in identifying and eliminating market
manipulation. One of the major goals for an exchange is to ensure ‘fair
play’ in their markets.
Providing an environment in which all participants uphold market rules
results in more liquidity, better spreads and more activity for the exchange
. Exchanges that successfully cultivate such environments are more
attractive to law-abiding traders than exchanges that do not.
Additionally, letting market manipulation continue within an exchange can be
costly. A Journal of Financial Economics study of an emerging market
highlights the costs of market manipulation directly.
McGovern
Asim Ijaz Khwajaa of Harvard University and Atif Mianb of the University of
Chicago examined data from the Securities and Exchange Commission Pakistan (
SECP). They found that annual rates of return were 50 to 90 percentage
points higher when brokers traded on their own behalf versus returns earned
by outside investors. Neither market timing nor liquidity provision by
brokers could explain this.
The authors found evidence of “pump and dump” price manipulation, which
accounted for up to half of a broker’s earnings. Large rents such as this
explain why emerging markets struggle to build volume.
Because of this, emerging markets often need to counteract market
manipulation with good, highly visible market surveillance coupled with
strong, well enforced regulations. These are powerful deterrents against “
pump and dump” and other illegal practices. For example, when TurkDEX
sought to establish a comprehensive trading system to detect abusive trading
patterns at high-speed market rates, it installed complex event processing
(CEP) software as its platform to speed the development and deployment of
its surveillance applications.
There are many types of behavior that can be categorized as market
manipulation and emerging markets need to be aware of the key types to
monitor for, including:
• Insider trading: Trading on material data that is not known to all
participants in the market. The classic example is illegally trading on
merger and acquisition data that moves a stock price significantly.
• False or misleading transactions: Disingenuous trades
deliberately intended to deceive other traders. “Wash trades,” for
instance, occur when an unscrupulous investor simultaneously buys and sells
a single instrument to increase its activity, potentially signaling that
there is material news imminent. ”Painting the Tape,” trading between
investors, also artificially increases the activity levels for an instrument.
• Price positioning: Altering the end-of-day price. ”Marking the
Close,” when a trader makes the last trade of the day at a price
significantly different from the current price, allows market-on-close
orders to be executed at a price that is advantageous to the manipulator or
accomplices. This can be especially damaging on an expiration Friday or an
index rebalancing day. Another variant of price positioning is the abusive
squeeze, whereby a person with significant control over the supply and
demand of a product engages in behavior to corner the market with the aim of
positioning the price of that product at a distorted level.
• Fictitious Devices: Buying or selling after erroneous news moves
an instrument’s price. ”Pump and Dump” schemes attempt to boost the price
of a stock through misleading statements so the perpetrators sell their
positions at the peak of the hype cycle. This practice is popular in smaller
exchanges and smaller stocks where the price can move quickly and
dramatically on material news. ”Trash and Cash” circulates bad news about
a stock, lowering the price so a trader can buy below fair market value.
A combination of several approaches is necessary to address market
manipulation and increase market trust in 2012 and beyond. New technologies
that can monitor all market activities in real time, including the options
streams, can identify potentially abusive behavior and flag it for
investigation. The challenge of identifying these behaviors across execution
venues needs to be addressed both at the national and international level.
Stephen Luparello, vice president of FINRA, has proposed several principles:
• Comprehensive surveillance. The regulatory structure should
provide a holistic approach to regulation, where regulators can monitor and
detect problematic activity across products (e.g., equity, debt and
derivatives) and not just within each market and market segment.
• Fine-grain information. The structure should guarantee sufficient
granularity and aggregation of audit trail data across markets and
financial products so that regulators can readily identify activities --
such as direct market access, high frequency trading and algorithmic trading
, among others -- and better design surveillance systems to detect market
manipulation and other abusive strategies.
• Openness. The structure should ensure that audit trail data is
transparent so that market participants’ trading activity is discernable to
regulators. It must also prevent participants from masking their identity
by using multiple identifiers or the identifiers of another broker-dealer.
Basically, knowledge is power. The more transparent and standardized we make
market data, the more power everyone will have -- making it tougher for
manipulators to survive and thrive.