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Message started by Co0olCat on 07/31/08 at 11:05:18

Title: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:05:18

This section lists white papers on Market Manipulation (MM).

MM creates distortions in market efficiency. Practice of MM leads to lower market participants' confidence, which could result in lower liquidity or ubnormally high volatility. As such Algo practitioners should be aware of these unfair techniques.

Since we respect copyright the section contains only links to external sources and short abstracts.

For consistency use following formatting:

Surname#1, N#1. and N#2., Surname#2 (or Surname#1, N#1 et al), date of publication, source

Paper Title


Short abstract.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:09:38

Aggarwal, R. K. and G. Wu, March 11, 2003

Stock Market Manipulation - Theory and Evidence


In this paper we present a theory and some empirical evidence on stock price manipulation in the United States. Extending the framework of Allen and Gale (1992), we consider what happens when a manipulator can trade in the presence of other traders who seek out information about the stock’s true value. In a market without manipulators, these information seekers unambiguously improve market efficiency by pushing prices up to the level indicated by the informed party’s information. In a market with manipulators, the information seekers play a more ambiguous role. More information seekers imply greater competition for shares, making it easier for a manipulator to enter the market and potentially worsening market efficiency. This suggests a strong role for government regulation to discourage manipulation while encouraging greater competition for information. Using a unique dataset, we then provide evidence from SEC actions in cases of stock manipulation. We find that potentially informed parties such as corporate insiders, brokers, underwriters, large shareholders and market makers are likely to be manipulators. More illiquid stocks are more likely to be manipulated and  manipulation increases stock volatility. We show that stock prices rise throughout the manipulation period and then fall in the post-manipulation period. Prices and liquidity are higher when the manipulator sells than when the manipulator buys. In addition, at the time the manipulator sells, prices are higher when liquidity is greater and when volatility is greater. These results are consistent with the model and suggest that stock market manipulation may have important impacts on market efficiency.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:15:40

Khwaja, A. I. and A. Mian, 2005, Journal of Financial Economics 78

Unchecked Intermediaries: Price Manipulation in an Emerging Stock Market


How costly is the poor governance of market intermediaries? Using unique trade level data from the stock market in Pakistan, we find that when brokers trade on their own behalf, they earn annual rates of return that are 50-90 percentage points higher than those earned by outside investors. Neither market timing nor liquidity provision by brokers can explain this profitability differential. Instead we find compelling evidence for a specific trade-based ‘‘pump and dump’’ price manipulation scheme: When prices are low, colluding brokers trade amongst themselves to artificially raise prices and attract positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the ensuing price fall. Conservative estimates suggest these manipulation rents can account for almost a half of total broker earnings. These large rents may explain why market reforms are hard to implement and emerging equity markets often remain marginal with few outsiders investing and little capital raised.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:24:50

Chakraborty, A. and B. Yilmaz, July 1999

Informed Manipulation


In asymmetric information models of financial markets prices (imperfectly) reveal private information held by traders. Informed insiders thus have an incentive not only to trade less aggressively but also to trade in the "wrong" direction so as to "confuse" the market and increase the noise in the trading process. They thus manipulate the information content of the market prices for private profit. The result holds when the value of the insider's information does not decay immediately and when the market is uncertain about the presence of an informed insider. We prove the result of a Glosten-Milgrom type Bid-Ask model as well as for a Kyle type of market order model where the insider faces price uncertainty.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:30:14

Du, J. and S.-J. Wei, March 2003, IMF Working Paper

Does Insider Trading Raise Market Volatility?


This paper studies the role of insider trading in explaining cross-country differences in stock market volatility. The central finding is that countries with more prevalent insider trading have more volatile stock markets, even after one controls for liquidity/maturity of the market and the volatility of the underlying fundamentals (volatility of real output and of monetary and fiscal policies). Moreover, the effect of insider trading is quantitively significant when compared with the effect of economic fundamentals.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:33:43

Ewerhart, C. et al, March 2007, International Journal of Central Banking 3 (1)

Manipulation in Money Markets


Interest rate derivatives are among the most actively traded financial instruments in the main currency areas. With values of positions reacting immediately to the underlying index of daily interbank rates, manipulation has become an increasing challenge for the operational implementation of monetary policy. To address this issue, we study a microstructure model in which a commercial bank may have strategic recourse to central bank standing facilities. We characterize an equilibrium in which market rates will be manipulated with strictly positive probability. Our findings have an immediate bearing on recent developments in the sterling and euro money markets.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:39:48

Eren, N. and H. N. Ozsoylev, 2008

Hype and Dump Manipulation


This paper introduces signaling in a standard market microstructure model so as to explore the economic circumstances under which hype and dump manipulation can be an equilibrium outcome. We consider a discrete time, multi-period model with stages of signaling and asset trading. A single informed trader contemplates whether or not to spread a (possibly dishonest) rumor on the asset payoff among uninformed traders. Dishonest rumor-mongering is costly due to regulatory enforcement, and the uninformed traders who access the rumor can be sophisticated or naive. The sophisticated traders correctly anticipate the relationship between the rumor and the asset payoff, whereas the naive ones take the rumor at its face value as if it truthfully reveals the asset payoff. The presence of sophisticated traders puts the informed trader off from rumor-mongering, because sophisticates fully infer the asset payoff from the rumor, reducing the informational rents enjoyed by the informed trader. Nevertheless we show that it can be optimal for an informed trader to create false hype among uninformed traders provided that there is at least one naive trader in the market and the cost of dishonest rumor-mongering is not too low. The false hype allows the informed trader to sell at an inflated price or buy at a deflated one. Intense regulatory enforcement, which makes dishonest rumor-mongering very costly, may not necessarily curb hype and dump schemes. Market depth and trading volume rise with "hype and dump" while market efficiency decreases.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 11:46:54

Siddiqi, H., December 2007

Stock Price Manipulation: The Role of Intermediaries


We model stock price manipulation when the manipulator is in the role of an intermediary (broker). We find that in the absence of superior information, the broker can manipulate equilibrium outcomes without losing credibility with respect to accurate forecasting. This result extends to the case when the broker prefers more investment to come into the market. However, when competition among brokers is introduced then the investors get their favorite outcome in the absence of superior information. This result has important implications for encouraging broker competitions in developing markets. Many developing markets are still not demutualized; hence broker level competition is limited in such markets.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 12:08:08

John, K. and R. Narayanan, 1997, Journal of Business 70 (2)

Market Manipulation and the Role of Insider Trading Regulations


We show that the regulation requiring corporate insiders to disclose their trades ex post creates incentives for informed insiders to manipulate the market by sometimes trading against their information. This allows them to increase their trading profits by maintaining their information advantage over the market for a longer period of time. Such manipulation lowers initial bid-ask spreads. We show how the insider's likelihood of manipulation is affected by her information advantage, the number of other insiders, market liquidity, the early arrival of public information, and the choice of trade size. The short swing profit rule curtails this manipulation.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 12:14:08

Allen, F. et al, January 2006

Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Markets Corners


Corners were prevalent in the nineteenth and early twentieth century. We first develop a rational expectations model of corners and show that they can arise as the result of rational behavior. Then using a novel hand-collected data set we investigate price and trading behavior around several well-known stock market and commodity corners which occurred between 1863 and 1980. We find strong evidence that large investors and corporate insiders possess market power that allowed them to manipulate prices. Manipulation leading to a market corner tends to increase market volatility and has an adverse price impact on other assets. We also find that the presence of large investors makes it risky for would-be short sellers to trade against the mispricing. Therefore, regulators and exchanges need to be concerned about ensuring that corners do not take place since they are accompanied by severe price distortions.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 12:19:13

Allen, F. and D. Gale, 1992, The Review of Financial Studies 5 (3)

Stock-Price Manipulation


It is generally agreed that speculators can make profits from insider trading or from the release of false information. Both forms of stock-price manipulation have now been made illegal. In this article, we ask whether it is possible to make profits from a different kind of manipulation, in which an uninformed speculator simply buys and sells shares. We show that in a rational expectations framework, where all agents maximize expected utility, it is possible for an uninformed manipulator to make a profit, provided investors attach a positive probability to the manipulator being an informed trader.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 12:34:27

Drudi, F. and M. Massa, 2005, Journal of Business, 78 (5)

Price Manipulation in Parallel Markets with Different Transparency


We provide a unique test of trading behavior under asymmetric information with parallel markets characterized by different degrees of transparency for the same asset. We consider the Treasury bond market and show that the informed dealers simultaneously place bids in the primary market and sell in the secondary market, repurchasing when the primary market closes. Price manipulation increases market depth in the more transparent market when the more opaque market is open. This supports the experimental findings of Bloomfield and O'Hara and shows how the existence of less transparent markets may increase the liquidity of the more transparent ones.

Title: Re: White papers on Market Manipulation
Post by Co0olCat on 07/31/08 at 12:37:05

Hillion, P. and M. Suominen, 2004, Journal of Financial Markets 7

The Manipulation of Closing Prices


Before the introduction of a call auction at the close, the last minute of trading at the Paris Bourse was the most active of the whole day. Even though the bid–ask spread increased substantially, the probability of large and aggressive orders increased, as did price volatility. In addition, both the one-minute returns and the proportion of partially hidden orders increased. In this paper, we develop an agency-based model of closing price manipulation, which can account for these phenomena. In addition, we discuss the optimal closing price mechanism under manipulation.

Title: Re: White papers on Market Manipulation
Post by statstrader on 01/23/09 at 00:00:14

Mozaffar Khan
MIT Sloan School of Management
Hai Lu
University of Toronto - Joseph L. Rotman School of Management

August 1, 2008
Do Short Sellers Front-Run Insider Sales?

We find evidence of significant increases in short sales immediately prior to large insider sales, consistent with information leakage and front-running. We examine a number of alternative explanations that the increase in short sales is driven by public information about the firm or about the impending insider sale, but the evidence is inconsistent with these explanations. Information leakage undermines market integrity and can lead to limited market participation and inefficient capital allocation. The results in this paper therefore have implications for the enforcement of insider information regulations and for timely disclosure of short sales information by stock exchanges.

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