European Online Journal of Natural and Social Sciences 2013; www.european-science.com vol.2, No. 3(s), pp. 430-433 ISSN 1805-3602 Manipulation of stock price and its consequences Bahram Moazeni1, Faride Asadollahi2 1Allameh Tabataba’I University, Tehran, Iran; 2University of Economic Science, Iran Abstract Public confidence increase the integrity of mar- ket, liquidity strength and its performance increases With expansion of financial markets and capi- and this has a significant importance in capital mar- tal market and also existence of so many buyers and ket, especially stock markets. sellers who are looking to gain from their trades, ma- The most important prerequisite for the develop- nipulation has taken a new display. Forgers are able ment and deepening of capital markets in each financial to manipulate the trading activity of the stock market system as the engine Economic mobile , is the public and offer a false display and mislead the investors and confidence to the integrity and rightness a basis for de- encourage them to buy their shares. Manipulation termining the fair price of a capital asset and thereby in capital market can cause investors to be uncertain optimize allocation of funds to different areas of the to the capital market and it is an obstacle to market economy .In general, raised issue is that if investors gain depth. Certain controls and special regulations needed the insightthat prices do not reflect true value of stock to deal with this phenomenon in order to avoid distort- ,this will destroy their confidence to the capital market . ing the minds of investors and confronting false prices. In a manipulated market or a market which is threatened by manipulation ,it is not expected that prices reflect a Keywords: Price manipulation, Market depth, Data true view of current which affect demand and supply. manipulation In fact, stock market manipulation can take full advan- tage and of the economicresources to deal with serious Introduction threat. The most controversial issues goes back to the Manipulation definition and its types first formation of the capital market in its modern Manipulation is any interference in the market form (Amsterdam, Netherlands), is discussion of fi- mechanism that prevents determination of a fair price, nancial market manipulation. Studies in other coun- as well as any factor that may affect the stock price tries about the manipulation of prices say that ma- artificially. Superficial transactions, Chinese order in nipulation refers to activities which in any way may a specific volume, increase in company›s stock price interfere the free function of supply and demand, to by rumors and stock collection at low prices in order create artificial prices and false view of market activi- to gain profit are the best examples for manipulation. ties, and finally lead to misleading market. United States Securities Exchange Commission has Discussion about manipulation in both devel- defined manipulation as follow: intentional and pre- oped and emerging markets is important issue to be planned behavior in order to control or to influence addressed. Although in developed markets through artificially to market of special security byinvestors . appropriate legislation and effective oversight mech- Market manipulation generally refers to activities anisms, many aspects of manipulation is limited. that may somehow interfere with the functioning of In contrast, emerging markets do not have ef- the free market supply and demand and activists mock ficient and effective regulatory system to prevent demonstration and create a false prices for stock mar- market manipulation, so market manipulation and ket, and finally lead to mislead market participants. price are impressed by people who have the power You can find manipulation as an important is- to widely order. sue in both developed and emerging markets. Prices Corresponding author: Bahram Moazeni, Allameh Tabataba’I University, Tehran, Iran. Email: [email protected] Copyright © Bahram Moazeni, Faride Asadollahi, 2013 European Online Journal of Natural and Social Sciences; vol.2, No. 3(s), pp 430-433 430 Social science section should be determined by the market without any ing or selling their companies in many countries,this interference .Prices should reflect the value of the type of manipulation has rarely occurs. stock by the accounting information and all infor- mation which is revealed about company, without Transaction-based on transaction manipulation any judgment on behalf of investors. In this type of manipulation,doing transactions One of the most important distortions in stock among themselves (with the purchase and sale of secu- prices can be done by manipulation and if investors rities) creates a vision of an active market and by arti- come to believe that the stock price does not reflect ficial increase in prices and trading volume will attract the true value of ��������������������������������������the����������������������������������������������������������������������� stock������������������������������������������������������������� they�������������������������������������������������� will���������������������������������������� lose������������������������������ ������������their������� conficonfi-- other investors to buy shares. One of the factors that dence to the market. Consequences of manipulation affect investors’ decision is the volume of transactions, which can have loss to investors is as follows: the lack liquidity which can be considered the most important of public confidence in the integrity and rightness of feature.It is evident that if the liquidity power increases market, justice in capital asset pricing, reduction in it can add to attractiveness of a share to investors. liquidity of stock, deduction in investment and not In such circumstances, forgers can manipulate optimized resource allocation and finally decrease in the trading activity of the stock market by offering a economic growth. Iran›s capital market as an emerg- false display and mislead investors and encourage ing market is not exempt from this issue and efforts encourage them to buy their shares and they will sell to attract investors into this market and obtaining their shares at higher prices. long-term public confidence in order toincrease in- vestment growth requires creating mechanisms to Background of manipulating stock prices prevent behavior that can lead to the manipulation Issue of market manipulation is almost as old as of the stock exchange .So attracting public trust for the first securities market. Historically artificial influ- investing in this market and preventing from intense ence in stock prices has been an important issue .So and sectional volatilities by right determination of that after the Amsterdam Stock Exchange began in prices will lead to resource allocation in areas with early 17th century, traders in the stock found that they high performance and make economical growth . can manipulate prices by several ways and thereby What can be found on manipulation of securi- achieve profits.So they used the stock in hand in a ties in all studies, there are three types������������� ������������of���������� ���������manipula- concentrated period, sold their shares by creating a tion. Each of researchers have examined one aspect weak perspective for share. Investors who feared of of manipulation. this situation also began to sell their shares .So traders could buy again after stock prices fell enough .At lower Manipulation based on information prices, sold shares are redeemed. This Strategy was This strategy is the manipulations of stock prices called“bear raid”. Due to the success of this strategy, by spreading false rumors and misleading informa- brokers found that using this strategy along with pub- tion .People who invest in securities are sensitive to lishing false information and misleading rumors about market risk. Investors impression by information the future of the company can also have better results. and rumors is shown in price volatilities and trades By formation of united security markets in oth- volumes. So,there would be incentive for forgers to er countries and lack of obstacle laws, this kind of publish misleading information and guide public manipulation in stock prices appear with intense opinion toward their illegitimate interests. and weakness points and got a new display. In some Examples of this kind of transaction is manipu- markets,a combination of different strategies is used lating coalition, that investors creating a coalition buy to accelerate profits of price manipulation at the securities ,then release rumors about company so they same time. By the way price manipulation is being can sell their shares with higher prices and gain profit. continued and a large amount of profit was obtained by some at Wall Street in 19th century . Manipulation based on practice After the 1929 crisis, there was a general con- Activities instead of transactions which affect cern thatdecline in stock prices is because of massive real or realized value of trading assets and change it. influx for short selling and manipulation is derived In this kind of manipulation managers are known as from the this matter. manipulators and their function impress prices,like SenateBanking and Currency Committee’s con- shutting down a factory to influence the price. But cerns about the operation of the securities market fol- since managers have limited gaining a position����� buy-buy- lowed an investigation .Although studies