Traditionally, security markets were susceptible to the risk of unfair trading and manipulations. In order to prevent or minimize this risk the Security and Exchange Commission was created in the US, which was supposed to regulate security markets in such a way that there would remain no room for unfair trading or manipulations. However, in spite of all measures undertaken by the Security and Exchange Commission, the problem of unfair tradings and manipulations in American security markets still persists and deprives companies which ground their activities on the legal basis of equal opportunities, while companies using unfair tradings and manipulations are in an advantageous position as long as their schemes remain uncovered. Nevertheless, today unfair tradings and manipulations are quite risky and potential benefits do not always outweigh the risk of failure or even imprisonment in case of uncovering the violation of existing legal norms and regulations of the Security and Exchange Commission.
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On analyzing the current situation in security markets, it should be pointed out that the problem of unfair trading and manipulations is mainly provoked by the desire of certain companies to maximize their profits using existing legislative gaps. Nevertheless, it is often difficult to clearly identify cases of unfair trading or manipulations since, as a rule, companies using them attempt to disguise it as a part of the legal and fair actions in the market. In this respect, it is very important to clearly define the notion of manipulations.
Traditionally, manipulations imply the buying or selling a security to create a false appearance of active trading and thus influence other investors to buy or sell shares (Heilbroner and Milberg, 197). Obviously, such manipulations are unfair since they do not reflect the real business activity of a company, instead, the company just attempts to creates a positive or sometimes negative impression and stimulate the desirable behavior of investors forcing them either to buy or sells shares of the company.
At the same time, unfair trading and manipulations should always involve the intention of a company that uses them. What is meant here is the fact that the company that uses unfair trading and manipulations is conscious of the fact that it uses unfair or even illegal methods and it uses them intentionally to achieve its goals and get certain profit, which, probably, could not have been achieved otherwise. At this point, it is worth mentioning the fact that many specialists underlie that illegal security markets manipulations involve intentional interference with the free forces of demand and supply (Lintner, 31). In fact, normally the market through supply and demand correlation, while the use of unfair tradings and manipulations can interfere in this natural process. Potentially, such interference can undermine the situation in security markets making them misbalanced for the basic laws of supply and demand do not work as effectively as they are supposed to do. On the other hand, the company using unfair trading and manipulations can get a competitive advantage over its major rivals which also deteriorates the situation in the market.
Today, there exists a variety of manipulations and unfair tradings which are used in the contemporary security markets. Among the most widely spread manipulations and unfair tradings, it is possible to name spoofing. In fact, spoofing implies that individuals are misusing the Limit Order Display Rule to move a stock’s bid or offer price (Pine and Gilmore, 145). As a rule, spoofing is done by entering orders on both sides of the market. Another manipulation is painting the tape or marking the close. This type of manipulation involves the placement of orders or quotes at the market close or open to raise, stabilize, or depress the price of the stock (Pine and Gilmore, 145). Furthermore, often scalping is used in the modern security markets. Basically, scalping is a practice in which a person, such as an investment adviser, purchases for his own account before recommending that security, and then sells the shares at a profit when the price rises after the recommendation is made (Pine and Gilmore, 145). Obviously, such practice is absolutely unfair and leads to the manipulations from the part of investment advisers who are more concerned with their personal interests than with interests of their clients. Also, it is possible to mention pump-and-dump. In fact, pump-and-dump is a scheme in which a manipulator will gain control over a large block of an issuer’s shares, crate investor interests through the publication of false statements about the issuer, and dump his shares into the rising market he creates (Seligman, 51). This scheme is quite sophisticated and is not always easy to uncover, but, what is more important, often issuers participate in the scheme by providing shares to the manipulator in violation of registration requirements, entering lock-up agreements, and issuing false statements.
In such a way, it is quite difficult to identify cases of unfair trading and manipulations. In this respect, it is possible to focus on signs of manipulations which can help uncover unfair tradings and manipulations. Specialists (Heilbroner and Milberg, 230) single out the following signs of unfair tradings and manipulations: intensive demand stimulations, supply restrictions, reverse mergers and reverse stock splits, false and misleading press releases, bogus share distributions, quick releases, purchasing successive blocks of securities at increasingly higher prices, paying third persons in cash or stock to tout the security, guaranteeing purchasers against loss to create artificial demand.
Obviously, unfair tradings and manipulations produce an extremely negative impact on the security market and put fair traders into a disadvantageous position. This is why it is extremely important to prevent unfair tradings and manipulations. In this respect, the role of the Security and Exchange Commission which should regulate and control operations in securities markets in order to minimize the risk of unfair tradings and manipulations. At the same time, companies and individuals operating in securities markets should also obey not only to legal norms and rules but they should also develop and obey to norms of the ethical code which would minimize the risk of manipulations and unfair traidngs. Otherwise, the situation in security markets will be not favorable for the stable growth.
Heilbroner, R. L. and W. Milberg. The Making of Economic Society. New York: New Press, 2000.
Lintner, J. “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” The Review of Economics and Statistics, 47 (1), 1965, 13-39.
Pine, J. and Gilmore, J. The Experience Economy. Boston: Harvard Business School Press, 1999.
Seligman, Joel. The Transformation of Wall Street. Aspen, 45, 2003, 51-52.
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