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| Securities
Markets – Unfair Tradings and Manipulations in
the US
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Traditionally, security markets were susceptible to the risk
of unfair trading and manipulations. In order to prevent or
minimize this risk the Security and Exchange Commission was
created in the US, which was supposed to regulate security
markets in such a way that there would remain no room for
unfair trading or manipulations. However, in spite of all
measures undertaken by the Security and Exchange Commission,
the problem of unfair tradings and manipulations in American
security markets still persists and deprives companies which
ground their activities on the legal basis of equal opportunities,
while companies using unfair tradings and manipulations are
in an advantageous position as long as their schemes remain
uncovered. Nevertheless, today unfair tradings and manipulations
are quite risky and potential benefits do not always outweigh
the risk of failure or even imprisonment in case of uncovering
the violation of existing legal norms and regulations of the
Security and Exchange Commission.
On analyzing the current situation in security markets, it
should be pointed out that the problem of unfair trading and
manipulations is mainly provoked by the desire of certain
companies to maximize their profits using existing legislative
gaps. Nevertheless, it is often difficult to clearly identify
cases of unfair trading or manipulations since, as a rule,
companies using them attempt to disguise it as a part of the
legal and fair actions in the market. In this respect, it
is very important to clearly define the notion of manipulations.
Traditionally, manipulations imply the buying or selling a
security to create a false appearance of active trading and
thus influence other investors to buy or sell shares (Heilbroner
and Milberg, 197). Obviously, such manipulations are unfair
since they do not reflect the real business activity of a
company, instead, the company just attempts to creates a positive
or sometimes negative impression and stimulate the desirable
behavior of investors forcing them either to buy or sells
shares of the company.
At the same time, unfair trading and manipulations should
always involve the intention of a company that uses them.
What is meant here is the fact that the company that uses
unfair trading and manipulations is conscious of the fact
that it uses unfair or even illegal methods and it uses them
intentionally to achieve its goals and get certain profit,
which, probably, could not have been achieved otherwise. At
this point, it is worth mentioning the fact that many specialists
underlie that illegal security markets manipulations involve
intentional interference with the free forces of demand and
supply (Lintner, 31). In fact, normally the market through
supply and demand correlation, while the use of unfair tradings
and manipulations can interfere in this natural process. Potentially,
such interference can undermine the situation in security
markets making them misbalanced for the basic laws of supply
and demand do not work as effectively as they are supposed
to do. On the other hand, the company using unfair trading
and manipulations can get a competitive advantage over its
major rivals which also deteriorates the situation in the
market.
Today, there exists a variety of manipulations and unfair
tradings which are used in the contemporary security markets.
Among the most widely spread manipulations and unfair tradings,
it is possible to name spoofing. In fact, spoofing implies
that individuals are misusing the Limit Order Display Rule
to move a stock’s bid or offer price (Pine and Gilmore,
145). As a rule, spoofing is done by entering orders on both
sides of the market. Another manipulation is painting the
tape or marking the close. This type of manipulation involves
the placement of orders or quotes at the market close or open
to raise, stabilize, or depress the price of the stock (Pine
and Gilmore, 145). Furthermore, often scalping is used in
the modern security markets. Basically, scalping is a practice
in which a person, such as an investment adviser, purchases
for his own account before recommending that security, and
then sells the shares at a profit when the price rises after
the recommendation is made (Pine and Gilmore, 145). Obviously,
such practice is absolutely unfair and leads to the manipulations
from the part of investment advisers who are more concerned
with their personal interests than with interests of their
clients. Also, it is possible to mention pump-and-dump. In
fact, pump-and-dump is a scheme in which a manipulator will
gain control over a large block of an issuer’s shares,
crate investor interests through the publication of false
statements about the issuer, and dump his shares into the
rising market he creates (Seligman, 51). This scheme is quite
sophisticated and is not always easy to uncover, but, what
is more important, often issuers participate in the scheme
by providing shares to the manipulator in violation of registration
requirements, entering lock-up agreements, and issuing false
statements.
In such a way, it is quite difficult to identify cases of
unfair trading and manipulations. In this respect, it is possible
to focus on signs of manipulations which can help uncover
unfair tradings and manipulations. Specialists (Heilbroner
and Milberg, 230) single out the following signs of unfair
tradings and manipulations: intensive demand stimulations,
supply restrictions, reverse mergers and reverse stock splits,
false and misleading press releases, bogus share distributions,
quick releases, purchasing successive blocks of securities
at increasingly higher prices, paying third persons in cash
or stock to tout the security, guaranteeing purchasers against
loss to create artificial demand.
Obviously, unfair tradings and manipulations produce an extremely
negative impact on the security market and put fair traders
into a disadvantageous position. This is why it is extremely
important to prevent unfair tradings and manipulations. In
this respect, the role of the Security and Exchange Commission
which should regulate and control operations in securities
markets in order to minimize the risk of unfair tradings and
manipulations. At the same time, companies and individuals
operating in securities markets should also obey not only
to legal norms and rules but they should also develop and
obey to norms of the ethical code which would minimize the
risk of manipulations and unfair traidngs. Otherwise, the
situation in security markets will be not favorable for the
stable growth.
Works Cited:
Heilbroner, R. L. and W. Milberg. The Making of Economic Society.
New York: New Press, 2000.
Lintner, J. “The Valuation of Risk Assets and the Selection
of Risky Investments in Stock Portfolios and Capital Budgets.”
The Review of Economics and Statistics, 47 (1), 1965, 13-39.
Pine, J. and Gilmore, J. The Experience Economy. Boston: Harvard
Business School Press, 1999.
Seligman, Joel. The Transformation of Wall Street. Aspen,
45, 2003, 51-52.
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