About market manipulation
Market manipulation is where someone misleads (or attempts to mislead) the market by actions or omissions that give a false appearance of trading activity, supply, demand or the value of financial products.
It involves financial products that are traded on a licensed market such as NZX or ASX, in particular shares, bonds and derivatives.
It can include inflating or deflating the market price or otherwise affecting the behaviour of the market, such as through false information or rumours, or deceptive trades.
The Financial Markets Conduct Act 2013 (FMC Act) includes provisions for two types of market manipulation: information-based and transaction-based.
1. Information-based manipulation
This is where someone says something - or otherwise shares information about a financial product - that they know (or should know) contains information that is false or seriously misleading.
Market manipulation occurs if what they say is likely to make a person trade in that product, or affect the price; or influence the way someone will vote on shareholder decisions.
Examples:
- ‘Pump and dump’ – where the manipulator ‘pumps’ up the price, e.g. by telling everyone the company is under-valued, before ‘dumping’ or selling their shares when the price increases.
- ‘Poop and scoop’ - where the manipulator talks down the price, e.g. by saying the industry is facing issues, before buying the undervalued shares.
Market manipulation can happen in internet chat rooms and social media accounts used by those interested in trading securities. Users have to be careful not to post statements about certain companies, or particular market activity, that are not true or that they do not have a reason to believe are true. This sort of commentary may attract the interest of the NZX Surveillance team or the FMA.
2. Transaction-based manipulation
This is where someone does something, or chooses not to do something, through orders or trades in the market, that will (or could) give a false or misleading impression about a financial product, e.g. about its popularity, availability, price or value.
Examples:
- Someone might attempt to manipulate the market by placing orders to buy shares when they do not actually want or intend to buy them. This would give a false impression of demand for the shares.
- Buying and selling the same financial products at the same time risks creating a false or misleading appearance about the true market interest in the product. Placing multiple orders in the market at different prices can also amount to market manipulation.
- There is danger of being accused of market manipulation when buying or selling a share or other financial product that is not traded very much (it is “illiquid” or “thinly traded”). This is because only a few small trades may move the price and create the appearance of market activity. This is a particular risk when trading in some of the small, illiquid companies listed on NZX.
In any of these examples it isn’t a defence for a person to claim they didn’t know it would give a false or misleading impression. The FMC Act says if they “ought reasonably” to have known, then that is a contravention.
The size or value of an order or trade doesn’t matter if its purpose was manipulation. It is also irrelevant whether or not a person makes any financial gain, or whether their actions actually affect the market – the test is whether they were “likely to” give a false or misleading impression.
There are some exceptions to these provisions. For more information, click to see
Financial Markets Conduct Act 2013, Part 5, Subpart 3—Market manipulation
To avoid any perception of manipulation, orders and trades should only be placed when the intention to buy or sell is genuine, and a trade should never be used to set a price for a financial product.
