Manipulation: Definition, Methods, Types, and Example

What Is Manipulation?

Market manipulation is conduct designed to deceive investors by controlling or artificially affecting the price of securities. Manipulation is illegal in most cases, but it can be difficult for regulators to detect and prove.

Market manipulation may involve factually false statements, but it always seeks to influence prices to mislead other participants.

Key Takeaways

• Market manipulation aims to mislead other participants.
• Manipulation is hard to detect and prove, but it’s also harder to execute in larger liquid markets.
• Two common types of stock manipulation are pump-and-dump and poop-and-scoop.
• Currency manipulation is a distinct political claim made in trade disputes between countries.

Manipulation Methods

Manipulation is more difficult for liquid securities. It’s much easier to manipulate a penny stock compared to a large-cap company traded in billion-dollar turnover.

The pump-and-dump is a market manipulation used to artificially inflate the price of a microcap stock before selling it. Less common is the inverse poop-and-scoop scheme, where false derogatory statements are made about a stock to buy it at a lower price. There’s also the short-and-distort variety, essentially a poop-and-scoop executed by short-sellers to profit.

While such schemes rely primarily on promotion or factual misstatements, they are often supplemented by illegal trading tactics designed to deceive.

One common means is order spoofing, which involves placing numerous buy or sell orders to move the stock price, then canceling them once other traders have adjusted their bids or asks accordingly. Order spoofing has tempted staff at Wall Street firms and shady day traders, and it can happen in the bond and metals markets as well as in the stock market.

Currency Manipulation

Currency manipulation is an accusation made in trade or exchange rate disputes, notably by the U.S. against trading partners alleged to set their currency exchange rate artificially low to boost exports. Governments and central banks can be accused of currency manipulation if they fix or seek to affect the exchange rate less openly.

Currency manipulation is a political term because foreign exchange policies are set by sovereign countries. Currencies are fixed or allowed to float for various internal and external motives, while currency manipulation claims are almost always the result of dissatisfaction with trade flows. Whether currency manipulation is taking place or not is often a subjective judgment.

The U.S. Treasury makes a semiannual report to Congress on the macroeconomic and foreign exchange policies of major U.S. trading partners. The December 2021 report concluded no major U.S. trading partner manipulated its currency’s exchange rate against the U.S. dollar to gain an unfair competitive advantage in international trade, while singling out Vietnam and Taiwan for additional scrutiny.

Currency manipulation is a political claim rather than an illegal market deception.

Example of Currency Manipulation Claim

On August 5, 2019, the People’s Bank of China (PBOC) set the Chinese yuan’s daily reference rate above 7 yuan per dollar for the first time in over a decade, depreciating the Chinese currency against the dollar and making Chinese exports cheaper. The rate was set after the announcement by the Trump administration of new tariffs on $300 billion worth of Chinese imports, which went into effect Sept. 1, 2019.

The same day the yuan exchange rate topped 7 per dollar, the Trump administration labeled China a currency manipulator, a designation lifted a few months later. The tariffs on Chinese exports, however, remained in place as of January 2022.