have an account?【sign in】Manipulating Markets: Uncovering Cases of Market Manipulation and How to Spot Them
barrosoauthorMarket manipulation is a practice that seeks to artificially influence the price of a financial asset, such as stocks, bonds, or derivatives. This can be done through a variety of methods, including fraud, price manipulation, and disguising information. Market manipulation not only damages the integrity of the market but also affects the investment decisions of investors, leading to a loss of trust and confidence in the market. In this article, we will explore some of the most notorious cases of market manipulation and how to spot them.
Cases of Market Manipulation
1. Enron
Enron was a U.S. energy company that collapsed in 2001 in what was one of the largest corporate frauds in history. The company used complex financial instruments, such as special-purpose entities (SPEs), to artificially inflate its profits and assets. These SPEs were used to hide Enron's true financial condition, leading to the manipulation of its stock price.
2. MF Global
In 2011, the brokerage firm MF Global ran into financial trouble, causing the collapse of the brokerage and the loss of $1.2 billion of client funds. The cause of the collapse was the unauthorized trading by MF Global's CEO John Corzine, who used client funds to manipulate the price of metals and agri-commodities.
3. Petrobras
The Brazilian oil and gas company Petrobras was caught up in a massive corruption scandal in 2014, involving bribes paid to politicians and company executives to artificially inflate the company's costs and reduce its profits. This led to a significant drop in the company's stock price and the resignation of the CEO.
4. LIBOR Rate Manipulation
The London Interbank Offered Rate (LIBOR) is the benchmark interest rate for unsecured loans between banks. In 2012, it was revealed that several major banks had manipulated the LIBOR rate in order to increase their profits. This manipulation affected the value of millions of financial products and led to numerous regulatory investigations and fines.
How to Spot Manipulation
1. Monitoring Price Trends
A sudden and abnormal rise or fall in the price of a financial asset may be a sign of market manipulation. Keep a close eye on the price trends and compare them to the historical patterns to identify any suspicious activity.
2. Analysis of Trading Volume
High trading volume can sometimes mask manipulation attempts, but low trading volume can be a red flag. If the price of a financial asset suddenly increases or decreases without a corresponding increase or decrease in trading volume, it may be a sign of manipulation.
3. Scrutinizing Company Financial Statements
Investigations into market manipulation often focus on company financial statements, particularly the balance sheet and income statement. Look for any unusual items or discrepancies in these statements and consider consulting an independent auditor or financial advisor for further analysis.
4. Monitoring News Releases and Corporate Governance
Company news releases and corporate governance practices can also indicate potential market manipulation. Be alert to any unusual corporate transactions, board changes, or changes in management and carefully review the company's code of conduct and compliance policies.
Market manipulation is a serious problem that can have far-reaching consequences for both investors and the economy. By being aware of the signs and taking the time to carefully analyze financial statements and trading patterns, investors can better protect themselves against manipulation and make more informed investment decisions.