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

Stock Market Manipulation - Theory and Evidence
http://www.afajof.org/pdfs/2004program/UPDF/P306_Asset_Pricing.pdf

Abstract

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.

Chakraborty, A. and B. Yilmaz, July 1999

Informed Manipulation
http://finance.wharton.upenn.edu/~rlwctr/papers/0007.pdf

Abstract

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.

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

Manipulation in Money Markets
http://www.ijcb.org/journal/ijcb07q1a4.pdf

Abstract

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.

Siddiqi, H., December 2007

Stock Price Manipulation: The Role of Intermediaries
http://mpra.ub.uni-muenchen.de/6374/1/MPRA_paper_6374.pdf

Abstract

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.

Allen, F. et al, January 2006

Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Markets Corners
http://fic.wharton.upenn.edu/fic/papers/06/0602.pdf

Abstract

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.

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

Price Manipulation in Parallel Markets with Different Transparency
http://www.journals.uchicago.edu/doi/pdf/10.1086/431437

Abstract

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.

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?

http://www.rotman.utoronto.ca/newthinking/Lu_Frontrunning.pdf

Abstract:    
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.