From Aaron L.: “The short version of the question is: Is it possible to inflate the price of a stock by placing limit buy orders at a price above the stock’s market price? The long version: There is a fairly thinly traded stock I watch (average trading volume: 2,500 shares a day). Its price fluctuates only slightly from time to time. Let’s say I buy 5,000 shares. Then let’s say I offer to buy some more (100) at a higher price. I do this several times (perhaps from different accounts) to try to make the appearance of general interest in the stock at the higher price and eventually have the appearance of interest turn into actual interest in trading at that level, so it becomes a so-called “base” price level for the stock. Then I sell my shares and make a killing. This seems an obvious sort of gambit, especially on a stock where the trading volume is small, so there must be a reason this would generally fail. Any thoughts on the subject?”
A.T.: Yeah, I have two main thoughts:
- There are SEC regulations against deliberate manipulation. If caught, you could be in hot water. Realistically, you would not get caught; but that’s partly because …
- It wouldn’t work. Normally, what you propose is called “painting the tape,” where a lot of little trades are done (though not necessarily above the current price range), to suggest, by the unusual activity, that “something must be up.” If nothing else, it’s a form of advertising — everyone watching the ticker sees this symbol they don’t recognize going by over and over, so curious investors around the world may take a look to see what the darn thing is. But a few 100-share trades are hardly going to arouse a lot of interest.
Consider: If the stock trades 2,500 shares a day, buying 100 shares here or there won’t move the price. And what if you really get into this and made 50 little trades of 100 and 200 shares each, accumulating 7,500 more shares, say, and edging the price up 3/8 in the process? Guess what: when you went to sell what are now your 12,500 shares (or whatever), you’d likely knock the price back down by even more than you edged it up.
Yes, there are ways to manipulate the market — some of the folks on various Internet sites passing on rumors may actually be starting those rumors in hopes of hyping the holdings they itch to sell.
But homework and patience will ultimately serve you far better as an investor than trying to find a legal scheme for beating the system that no one ever thought of before — or an illegal one you won’t be caught at.
But you knew that.
Quote of the Day
Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.~John Stuart Mill, 1867 (Like shopping centers in the middle of the desert. Or millions of pages of legal documents.)
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