Top 10 Anomalous Stock Market Practices that Affect Stock Prices

Anomalous stock market practices by some are the devil that sometimes jeopardizes the organic flow of the stock prices. It sends waves in the marketplace so high and so low that little players like you and me get caught-up in the tidal waves of manipulated stock prices – leaving us like wet hens washed upon the beach.

In this article, we will explore ten notable practices that have historically affected stock prices and discuss how they can adversely impact small traders. It is important to note that market regulations and surveillance mechanisms continuously evolve to address these issues. Nonetheless, understanding these practices can empower investors to make more informed decisions and navigate the stock market with caution.

1. Insider trading

Illegal trading based on non-public information can lead to unfair advantages for those with access to privileged information, affecting the price movement before it becomes public knowledge. These insiders can include company executives, directors, employees, or anyone who has access to confidential information that could affect the company’s financial performance.

Insiders may buy or sell shares of their company’s stock based on confidential information about significant events or financial results that have not yet been disclosed to the public. For example, an executive who learns that the company is about to announce positive earnings may buy shares in advance to benefit from the subsequent stock price increase.

2. Pump and Dump Schemes

Fraudulent actors artificially inflate the price of a stock by spreading positive rumors or false information, only to sell their shares once the price has risen, leaving unsuspecting traders with losses.

The most publicized news on pump and dump scheme that happened on the stock market is the case of Jordan Belfort and Stratton Oakmont. Belfort was a stockbroker who ran a firm called Stratton Oakmont in the 1990s. Stratton Oakmont was known for its aggressive sales tactics and its use of pump-and-dump schemes to inflate the prices of stocks.

Belfort and his associates would buy large quantities of shares in a small, thinly traded company. They would then spread false and misleading information about the company, such as rumors of a takeover or a new product launch. This would cause the price of the stock to rise, and Belfort and his associates would then sell their shares at a profit.

3. Front-Running

Brokers or traders taking advantage of advance knowledge of pending orders from their clients by executing their own trades beforehand, leading to adverse price movements for the client.

By front-running, the broker or trader can potentially profit from the anticipated price movement resulting from their client’s order.

The broker or trader must have access to non-public information about pending orders from their clients. This information can be obtained through various means, such as having direct access to client order flows or being involved in order routing and execution.

Armed with the knowledge of pending client orders, the front-runner executes their own trades in the market before the client’s orders are filled. The front-runner aims to take advantage of the price movement caused by the client’s order by buying or selling the relevant security.

That is why Regulatory authorities closely monitor brokerages to ensure compliance with rules and regulations, including those related to front-running. If any brokerage or its employees engage in front-running practices, it is typically considered a serious violation that can lead to legal consequences, regulatory penalties, and reputational damage.

Source: Pexels

4. High-frequency Trading (HFT)

Sophisticated computer algorithms enable large institutional traders to execute trades at incredibly high speeds, giving them an advantage over smaller traders and potentially impacting stock prices.

HFT firms invest heavily in cutting-edge technology infrastructure to minimize the time it takes for their trading systems to receive market data, process it, and send out trade orders. This includes co-locating their servers in close proximity to the exchanges and utilizing high-speed data connections.

You can learn more about High-Frequency Trading Here.

5. Wash trading

When traders simultaneously buy and sell the same stock to create the illusion of high trading volume, artificially inflating the perceived interest in the stock and potentially manipulating prices.

This may sound the same as pump-and-dump scheme, but the only difference is that Wash Trading is an organized and simultaneous buying and selling of the same stock instrument. Then by the time a lot of unsuspecting traders are on the same boat, the unscrupulous band will immediately sell their trades leaving those at the top helpless while watching the stock price plummet. 

Victims of Wash Trading are caught by what they call FOMO or Fear Of Missing Out while watching the stock instrument potentially gaining bull momentum – so they buy in.

While pump-and-dump involve artificially inflating the price of a security, typically through misleading information or promotions, to entice unsuspecting investors to buy the stock. Once the price is pumped up, the perpetrators sell their own shares at the inflated price, causing the price to collapse and leaving other investors with significant losses.

Top 10 Anomalous Stock Market Practices that Affect Stock Prices
Source: Freepik

6. Spoofing

The act of placing fake orders to deceive other traders and create false impressions of supply and demand. Traders cancel the orders once the market reacts in the desired direction.

A trader engaging in spoofing will enter large orders to buy or sell a particular financial instrument with the intention of canceling or modifying those orders before they are executed. These orders are intentionally placed to create a false impression of market interest or liquidity.

In 2015, Navinder Singh Sarao, a British trader, was arrested and accused of contributing to the “flash crash” of May 6, 2010. He was accused of using spoofing techniques to manipulate the market by placing large sell orders and then quickly canceling them, creating false selling pressure. Sarao’s case received significant media attention due to its connection to the flash crash event.

7. Short-Selling Manipulation

Coordinated efforts to artificially drive down the price of a stock by spreading negative rumors or conducting large-scale short-selling, which can negatively impact smaller traders who are unable to compete with such maneuvers.

Needless to say, this can be a direct opposite of a pump-and-dump scheme. Short-sellers are like vultures that takes advantage of the falling or ‘dying’ stock instruments. Even if short-selling in itself is completely legal, this trade modality is not sustainable in the long run as it profits on the market’s down trend, and we don’t want that.

But on the other hand, dips and downs are part of the organic movement of the stock market. Just so happens that there are sectors of the trading populace who profits on the dips other than the ups.

Learn more about how short-selling manipulation is being done

Source: Pexels

8. Market Manipulation through Social Media

The power of social media platforms can be exploited to spread false information or manipulate sentiment about a stock, potentially leading to significant price movements.

This manipulation can be used either way. This can be used to hype the stock market or a certain stock instrument or it can be used to play down the same as well.

So, you might want to take social media news bits with great caution specially if your hard-earn money is at stake –  most specially that fake news is almost second nature to social media. 

9. Algorithmic Trading Glitches

Errors or malfunctions in algorithmic trading systems can lead to sudden and extreme price movements, impacting small traders who may not have the same technological capabilities to respond quickly.

Algorithmic trading glitches can occur due to errors in the underlying software or coding of the trading algorithms. These errors may arise from programming mistakes, incorrect data inputs, or faulty logic within the algorithms.

Learn more about Algorithmic trading glitches here.

10. Dark Pools

Private trading venues that enable large institutional investors to trade large blocks of securities away from public exchanges, potentially impacting price discovery and creating information asymmetry.

Dark pools provide a level of privacy and anonymity to institutional investors. When placing orders in a dark pool, the details of the orders, such as the price and quantity, are not publicly visible. This confidentiality helps prevent information leakage and reduces the market impact of large trades.

Examples of these “dark pool” trading institutions are InstinetLiquidnetSigma X, Citi Match and more.

Dark Pool in itself is not illegal as they are operated by legal companies and entities. What made it illegal are the practices of some scrupulous stakeholders – such as price manipulations, non-disclosure of legal information, breach of legal contracts and so on. 

Stock Market: Top 3 Things You Should Know
Source: Pexels

The stock market is a complex and dynamic system influenced by a multitude of factors, ranging from economic indicators to investor sentiment. However, among the many legitimate forces shaping the market, there exist certain practices that deviate from ethical norms and fairness, ultimately impacting the price and movement of stock prices. These anomalous practices can have far-reaching consequences, particularly for small traders who often lack the resources and expertise to navigate these murky waters.

Just like any other trade in life, it could be real estate, any other businesses or stock market trade – your due diligence is your first-line financial safeguard. But don’t be too paranoid of these activities, the organic movement of the market will always have odds and favors for you with or without manipulators. Loses are guaranteed but gains are plentiful if you are vigilant and diligent enough, rendering loses negligible.

But if after deep soul searching and talking to a Himalayan Monk, you have realized that stock trading is not for you, then don’t fret-out maybe real estate is your best bet. We have handfuls of real estate goodies in the silver platter for you, so go, check them out.

So, good luck. The Power be with you on your journey!



Author's Corner

Sweet, I blame you not, for mine the fault was, had I not been made of common clay. I had climbed the higher heights unclimbed yet, seen the fuller air, the larger day. From the wildness of my wasted passion I had struck a better, clearer song, Lit some lighter light of freer freedom, battled with some Hydra-headed wrong. – Oscar Wilde

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