Market Abuse and Manipulation
Market abuse occurs when one or more people use unethical practices which harm the integrity of the financial markets and disadvantage traders. Any market or instrument can fall prey to market abuse and manipulation – shares, commodities and forex included.
Learn about how to identify and avoid the different types of market abuse with our guide.
Remember, this webpage does not constitute investment advice.
What is market abuse?
Market abuse is illegal in the United Kingdom and falls under the Market Abuse Regulation (UK MAR). This is enforced by the Financial Conduct Authority (FCA).
There are several types of market abuse to watch out for, including but not limited to:
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Insider dealing
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Unlawful disclosure
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Market manipulation
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Attempted manipulation
At the time of writing, each of these four types are made a civil offence by UK MAR as per the FCA website.
Types of market abuse
Insider dealing
Insider dealing is when a person uses inside information to make trades based on the expected price movements that follow.
Inside information is unavailable to the public and includes insights concerning an asset which are likely to result in significant price movements, such as unreleased data from a publicly traded company about its financial performance.
Those who commit insider dealing are guilty of using inside information to gain an unfair advantage in the market.
Say an employee at a firm was privy to inside information about an upcoming merger, and bought or sold the firm’s shares ahead of that information being made public. That employee is guilty of insider dealing.
Unlawful disclosure
Unlawful disclosure is the communication of inside information to unauthorised recipients.
Insider information may be used for insider dealing if leaked before its intended release. Data leaks are when a recipient of inside information publishes it in the public domain without consent from the issuer.
When this data is leaked prematurely, it can leave traders unprepared for the unexpected price shifts that follow.
Market manipulation and attempted manipulation
Market manipulation occurs when parties intentionally mislead the markets using manipulation techniques
Market manipulation is a common form of market abuse – it includes techniques like wash trading, spoofing and front running, all of which you can find out about below.
Some market manipulators broadcast false or misleading information – such as a fake rumour or market statement – to artificially inflate an asset’s price.
Others directly manipulate the price and volume data for personal gain, making fake trades to create a false impression of demand.
How to identify market manipulation
It’s easier to identify market manipulation when you understand the different forms that it takes. Here are some to watch out for:
Pump and dump
In a pump and dump, market manipulators may purchase a high volume of shares in a low-value company then circulate false rumours about it, disguised as facts.
This serves to artificially inflate the price, and ends with the market manipulator selling their holdings – to the detriment of the asset’s price, and any parties who have bought it.
Bear raiding/trash and cash
Bear raiding works like a pump and dump in reverse, artificially driving an asset price down below its real value by spreading negative false information.
Market manipulators purchase a large amount of the asset during this time to sell once it recovers its value later.
Wash trading
Wash trading is buying and selling to create a false impression of an asset’s price, supply and demand or volume.
A wash trader might mislead the market by simultaneously purchasing and selling a financial instrument to produce artificial trading volume and drive an asset's price higher, selling their own holdings before the market corrects.
Front running
Front running occurs when an individual or group within a financial company, such as a broker, exploits internal systems to manipulate the market.
For example, the front runner may use inside information about pending client transactions to anticipate price movements, buying or selling into the market first to profit off the expected movement.
Spoofing
Making large orders to buy or sell a derivative, creating an illusion of trading activity and price trends, is known as spoofing.
Market manipulators have no intention of completing the orders that they’ve placed. Instead, they cancel them before they can be fulfilled after they have taken advantage of the price movements.
How to avoid market manipulation
As we’ve seen, market manipulators usually attempt to deceive the market in two ways: by manipulating the performance of an asset or by spreading false information.
You’ve learned what market abuse looks like. So here’s how to avoid it.
Check price and volume data
Market data in conjunction with trading analysis techniques and technical indicators can reveal valuable insights into an asset's current and historical performance, such as patterns that might indicate market manipulation.
Look for red flags, such as:
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Sudden price movements, particularly with low-volatility assets.
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Large orders that appear and disappear quickly, but aren’t executed.
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Significant and unexplainable increases in trading volume.
If the data doesn’t seem to add up, you can use:
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Technical indicators, like relative strength index (RSI) and moving averages, to investigate discrepancies between price movements and volume.
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Risk management – including stop-loss* and take-profit orders – to protect your holdings.
Protect yourself from trading activity manipulation by integrating these checks and tools into your trading strategy.
*Stop-losses are not guaranteed.
Watch for misleading information
If you come across an overly positive news story that seems too good to be true – or unusually negative news about a financial instrument – it might be fake. False or misleading information comes in many forms, but you can look for red flags such as:
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Spelling and grammar mistakes, especially in official documents like press releases.
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Exaggerated claims that don’t seem to align with asset or company performance.
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Sensational language and phrases used to provoke an emotional response.
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Unsubstantiated statements and predictions that lack credible sources.
If something about the information or source you’re reading seems suspicious, then:
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Verify the source to ensure the information is accurate.
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Cross-reference information with multiple credible sources.
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Research the underlying asset’s fundamentals – like price and volume data.
