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Share market manipulation

I have alluded several times previously to manipulation of share prices. Take my word for it, this practice is common in the Australian market (and no doubt others).

The most common form of price manipulation is ramping, or artificially pushing the price up in order to sell larger volumes at a higher price. Signs of ramping include strong buying right at the close of trade at prices higher than during the day and big price jumps on low volume.

If a company has some very good news to announce and people close to the company want to buy more stock at good prices, another common form of manipulation is that of artificially forcing the price down, a sort of negative ramping. Signs of negative ramping are the exact mirror image of normal ramping, larger than necessary falls right on the close and big falls on small volume as sellers inexplicably fail to haggle or stand their ground.

This is particularly cruel to inexperienced market players, who fail to notice the warning signs and panic out of the stock, only to see it suddenly shoot up after spiralling downward. This practice has been referred to as 'shaking out the Woodies', a comparison of gullible investors to wood-ducks, which are notable for the ease with which they can be lined up and shot.

One of the favourite times for ramping is when a company's options are about to expire. Imagine that company A has a series of options with an exercise price of 20c, but the shares are trading at only 12c. The company would love the options to be exercised as the sum of 20c per exercised option goes to them and they are short of cash. (Penny dreadfuls always are!) But no-one is going to pay 20c to get a share they could buy on market for 12c, so the company must get their price over 20c, even if only for a while, to make it worthwhile for option holders to exercise.

Meanwhile the option holders also want the price of the shares to rise before their options expire worthless, so there are plenty of people with a motive for manipulation.

The lesson is that you should be extremely cautious about buying into a company that has recently risen strongly just before an option series expires, the shares have an unfortunate tendency to drop again once the money is safely in the company coffers. 

NEXT ... Buy the rumour

 


 

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