Defining Market Manipulation & the GameStop Stock Surge

February 1, 2021

What is Market Manipulation?

Market manipulation refers to a deliberate attempt to artificially inflate or deflate the price or market for a product, security, or commodity. Essentially, market manipulation schemes trick investors by either controlling the market or giving a false picture of its trends. A company, group, or individual typically manipulates the market to make or boost profits.

Market manipulation is illegal in most cases.

For an example of a legal but potentially unethical form of market manipulation, check out our article on OPEC and its role in the oil market.

A Deeper Dive into Market Manipulation

Market manipulators try to influence a market, product, security, or commodity so that it differs from the true price. When the market price is under-or overvalued in relation to the true price, manipulators can exploit the difference through methods such as arbitrage (simultaneously purchasing and selling identical security, commodity, or currency, across two different markets).

Market manipulation, at its core, is deception.

The manipulator tricks other market participants into thinking the manipulated price is the true price. Market manipulation does not necessarily involve spreading factually false statements. It does, however, always entail an attempt to influence prices in order to create false impressions for other market participants.

Because market manipulators create and later reverse false pricing, they harm market efficiency and unknowing investors.

The Difficulties of Regulating and Manipulating Markets

In truth, regulators and manipulators both face difficulties in achieving their respective goals.

For regulators and other authorities, it can often be hard to detect and pinpoint market manipulation. Many variables naturally affect markets, and some are not precisely quantifiable. Thus, going through countless factors and picking out artificial ones prove difficult for regulators.

Manipulators face difficulties when the size and number of participants in a market grow. That’s why manipulating the share price of small companies (e.g. penny stocks) is much easier than the share price of large companies. Furthermore, market participants tend not to monitor small businesses as closely as they do medium and large companies.

The Zero Theft community has thoroughly researched potentially rigged areas of the economy and have come up with an accurate estimate of how much is being ripped off from the public. Take part in creating an economy that gives you the value you deserve.

Market Manipulation Methods

Many different market manipulation methods exist, but they’re often coupled with spreading false information through online channels, forums, discussion boards, etc. investors use. The dual forces of disinformation and illusory changes in the market can encourage or pressure traders to buy/sell an investment.

The two most common (and oddly named) types of market manipulation are:

Pump and Dump
Poop and Scoop

Pump and Dump

Pump and dump involve the artificial inflation of security prices and generally function as one part of a grander market manipulation scheme.

Manipulators (often stock promoters) strike a deal with company affiliates and large position non-affiliates. The promoter gets the word out on security in exchange for shareholders to release some stocks into a free trading status.

The manipulator then executes the ‘pump.’ They send out an email blast full of false information on the company’s stock to millions of non-professional investors. In other words, those who invest primarily in just their retirement funds and maybe have some but not extensive knowledge of the stock market. The manipulator hopes that the release of the shares and the deceitful email will convince investors to drive up the price of the stock and volume to higher points.

If they manage to accomplish both, the promoter ‘dumps’ their shares, selling off their shares at an artificially high price. The stock price falls, leaving those who got duped with an overvalued investment.

Poop and Scoop

The poop and scoop technique is essentially the opposite of the pump and dump. Market manipulation artificially deflates the prices of a stock. It does not get used as frequently as the pump and dump because it is difficult to damage the reputation of a good company so you can tank its value.

The ‘poop’ refers to the deflated prices of the stocks, and the ‘scoop’ to the manipulator buying up the undervalued shares. When the stock price rises, the manipulator comes out with a handsome profit.

Other Market Manipulation Examples

Beyond those two types of market manipulation, many more strategies exist. We’ll cover some other slightly less common schemes.

Price Fixing

Price fixing refers to a simple market manipulation scheme where competing businesses work together to artificially set prices, for example. Price fixing has allegedly occurred on a global scale in the past, with the LIBOR scandal.

Standard Disclaimer

The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.

Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.

DID YOU KNOW?

LIBOR is a global benchmark interest rate for financial deals, including interbank lending.

Bankers from multinational financial institutions allegedly committed market manipulation by working together to set the LIBOR rate. They would have done this to better their employers’ portfolios or make certain entities seem more credit-worthy than they actually were.

Painting the tape

Painting the tape refers to when manipulators work together to inflate the price of a security by trading it among themselves. This scheme makes other market participants believe that a lot of trading activity is occurring. Manipulators hope to build interest and momentum so more and more investors buy the security, thus causing its price to shoot up. When the price peaks, the manipulators will sell off the overvalued security to unaware investors.

Wash trading

While market manipulation tactics usually consist of a few people trying to trick a lot of people, wash trading comes down to a single individual who’s running the scam. To make it work, a big-time influencer or investor buys and sells the same stock over and over again in quick succession to increase its volume. This makes the stock attractive to potential investors, who think the spike in activity means it’s worth jumping on.

Dark pool trading accounts for ~30% of all trading. Do you think billions of concealed trades could be happening without us even knowing it?

Cornering the market

Corner the market involves manipulators buying a sufficiently large amount of an asset in order to create as much of a monopoly as possible.

The earliest example of this market manipulation tactic appeared in the 6th century B.C., in Aristotle’s The Politics. Penniless philosopher Thales of Miletus used his knowledge of astronomy to predict that a large crop of olives would come the following year. He scrounged together some money and rented out all of the olive presses in his region for cheap (as olives weren’t in season). Lo and behold, Thales’ proved prescient, as olives grew prolifically. There was a sudden demand for olive presses, allowing Thales to rent them out on his terms. In a matter of months, he became an olive press tycoon.

Currency Manipulation

Currency manipulation, however, is a legal, systematized class of market manipulation. An official authority, typically a government or central bank, will manipulate the value of its currency to achieve an economic policy objective.

A common reason why an official authority manipulates its currency is to affect the country’s Balance of Trade (BoT). BoT refers to the difference between the value of a country’s exports and its imports for a given period.

A country might opt to devalue its currency when trade deficits occur (e.g. exports are lower than its imports). By devaluing its currency, the country reduces the apparent cost of its exports. A reduction in the value of its currency (i.e. lower prices) should make the country more competitive in the global market. Consequently, the cost of imports should increase, encouraging domestic consumers to buy domestic rather than foreign products. A country that devalues its currency can thus reduce its trade deficit.

While currency manipulation does not necessarily break laws and carries the negative stigma of most other forms of market manipulation, that does not mean currency owners operate with complete immunity and freedom. Authorities that engage in currency manipulation can be questioned by other nations and/or sanctioned by their trading partners. Also, international regulatory bodies such as the World Trade Organization (WTO) have started playing a much more prominent role in investigating and addressing accusations of unethical or flagrant cases of currency manipulation.

Stock Market Manipulation: The GameStop Short Squeeze

Just recently (as of January 2021), stock market manipulation became a hot topic due to the astronomic rise of the stock of Gamestop, a struggling video game chain.

The company’s shares reportedly increased in value by nearly 700%, in a single week. As you can see from the graph above, the stocks experienced a massive and sudden spike in value. But you’ll notice that their value has already started to plummet just about as quick as they rose. So what caused this case of stock market manipulation?

Short seller fodder

Due to GameStop’s difficulties preceding and then exacerbated by the Coronavirus pandemic, some financial analysts suggested ‘short-selling’ GME (GameStop stock).

DEFINITION

Short-selling refers to when an investor borrows stocks and immediately sells them. The investor hopes that the value of the stocks goes down as much as possible before they have to buy the stocks again to return them to the original loaner. If investor buys and returns the stock at a lower price than when it was loaned and sold, they make a profit from that price differential.

For example, you borrow X’s stock and immediately sell it for $10. You have regained your money, but you still need to give back the stock to the loaner. You know that the X has been shutting down stores and laying off employees, so you wait. Let’s say X’s stock drops by $5. That’s when you swoop in, purchase the stock, and return it to the loaner.

You’ve made a profit of $5.

But back to Gamestop.

Investors essentially followed the advice of those analysts, borrowing and selling GME with the hope that GameStop’s stock would continue to decline.

A 2017 Forbes article reports, “For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed…Buying back company stock can inflate a company’s share price and boost its earnings per share — metrics that often guide lucrative executive bonuses.” See what the ZT community has uncovered about stock buybacks…

The Rebound, The Short Squeeze

However, in August 2020, pet food site Chewy.com co-founder Ryan Cohen and two of his colleagues started investing in GameStop through RC Ventures (Cohen’s investment firm). With GameStop’s budding success in e-commerce over the Christmas season, RC Ventures continued to buy stock and started pushing for the video game chain to shift its focus to selling online. Perhaps seeing Cohen as something of a savior, GameStop appointed him and two of his colleagues to its board of directors earlier this month.

The market responded positively to the changes, causing the stock to climb again. Short sellers found themselves in a predicament. To cover their borrowing, they had to purchase more GME. This frenzy resulted in GME doubling in just a couple of days.

This is what’s called a ‘short squeeze.’

A short squeeze occurs when investors who have wrongly bet against a rising stock have to purchase it to cover their losses. The higher the price goes, the more money will lose on each stock.

To return to the example above, let’s say you loan stock and immediately sell it for $10. The value drops to $6, but suddenly it rebounds quickly. To return the stock to the loaner, you’re going to have to buy the stock back at a loss if you don’t act quickly enough. Buying at $15, for example, results in a loss of $5.

But what has this all got to do with stock market manipulation?

Potential Market Manipulation by Redditors

Non-professional investors on the popular subreddit WallStreetBets honed in on GME’s sudden surge. With 6 million self-identified ‘degenerates,’ r/WallStreetBets has the manpower to move the market. And that they did.

According to an NPR article, “Some did this to make money; others did it to thumb their noses at Wall Street; but a large proportion of them appear to have done it to hurt short-sellers, who had placed heavy bets that the price of GameStop shares would fall. By pumping up the price of GameStop shares, the day traders trapped the short sellers in something called a short squeeze, which had the double effect of bruising the short-sellers, while driving the stock price through the roof.”

It’s odd to think that market manipulation might have actually arguably resulted in a rare win for the public over Wall Street. Ironically, an investing app named Robin Hood has blocked non-professional investors—their client demographic—from investing in GME. The war between short-sellers and investors appears far from over, but it has definitely shown the power of market manipulation. Bad or good.

Market Manipulation, is it a part of the Rigged Economy?

Whether or not market manipulation is ethical in the GameStop case deserves debate, but as a general rule of thumb, you should remember that it’s usually illegal and leads to the average citizen getting ripped off.

And that’s what the Zero Theft Movement wants to end.

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The public has spoken! See how much the rigged economy is ripping off from you.

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