You will commonly hear that the stock market is “rigged” or manipulated which is actually true. Manipulation refers to artificial inflation or deflation of the price of a security. Also known as price manipulation, it involves the literal manipulation of a financial market for personal gain. It means influencing the behavior of the securities with the intent to do so.

Manipulation comes in many forms

  • The spread of false information of a stock
  • The rigging of prices and trades to make a stock look more traded than it actually is
  • The rigging of quotes to influence the demand or lack thereof

The Pump

The Pump is a form manipulation that is used in order to inflate the price of security artificially. The Pumpers then liquidate their holdings, and followers are left with an overvalued security. This once was reserved on stocks with micro-market capitalization made famous by the Wolf of Wall St, but this technique is becoming more prevalent in the NASDAQ and NYSE.

How The Pump Happens

They first have to initiate a test of interest by flooding volume into the market. The way they do this is by Wash Trading or a market participant buys and sells the same asset at the same time.

This artificially increases the volume of the stock and traders may see the volume as a precursor to a large move upwards and start buying in. If the traders don’t join in, then the test failed, and the manipulators move on.

Spotting The Pump

You will be looking for a shallow candle that is disproportionate to the average volume. A shallow candle with above average (2x,3x) volume should raise alarms of manipulation in the works.

Artificial Deflation

Artificial deflation happens when an entity (HF, Bank, etc.) has an interest in the stock price going lower. This could be that they want a cheaper entry into a Large Cap stock or they want to Bankrupt a smaller company. This is done in two ways.

  • Placing a large amount of small orders at a price that is lower than the current market price of that security. Investors take this as a negative reaction and sell.
  • Shorting a company near projected stop loss levels or “Stop Hunting“, looking to insight fear and panic letting the stops do the rest of the dirty work.

If the movement of the candlestick doesn’t match the volume then you know that the price action is not organic. The market is very manipulative so take low volume moves with a grain of salt.