How to manipulate the market?

One broker shared with me this joke:
Broker: Hello Mr Smith, I have this fantastic undervalued stock doing technology. It has high growth potential and trading at only $1. Our team rate it a strong BUY. So, I recommend to you before other investors jump in.
Investor: oh really? Ok. I’ll put in $5m.
Broker: That’s fantastic.

Next day,
Broker: Hello Mr Smith, the shares you bought yesterday rose by 10%. We still rate it a good buy. Will you want to buy some more?
Investor: wow, 10% in one day. Great! I’ll put in $5m more.
Broker: Good decision.

Next day,
Broker: Hello Mr Smith, the price rose by another 10%. You have got 20% return in 2 days. Do you want to buy more before other investors jump in?
Investor: wow, 20% in 2 days! I’m very happy with that. I’m not greedy. Please help me sell all of them now to take profit.
Broker: hmmm. Sell to who?

Above conversation can happen in real life. How? Try it on illiquid stocks.

Illiquid stocks refer to those stocks that have low daily transaction values. In other words, if you own the shares and want to sell, you are likely going to have to sell for considerably less than current market price.

That’s one way to manipulate the market, especially illiquid penny stocks. For example, some deep pocket investor bought shares worth $1m of an illiquid stock with market cap $30m. That buy itself can push the price up by 5%.

Here’s how it works:
For illiquid stocks, the bid-ask market depth can look like this:
Bid Price Bid Volume Ask Price Ask Volume
$1.00 10,000 $1.01 12,000
$0.99 15,000 $1.02 14,000
$0.98 18,000 $1.03 17,000
$0.97 20,000 $1.04 19,000
$0.96 25,000 $1.05 22,000
$0.95 30,000 $1.06 27,000
 This table shows that there are buyers who want to buy 10k shares at $1.00, 15k shares at $0.99, 18k shares at $0.98, and so on.

Also, there are sellers who want to sell 12k shares at $1.01, 14k shares at $1.02, 17k shares at $1.03, and so on.
If you are a buyer and wants to buy 70k shares, you can choose to set your price limit at $1.00 so that your trade will be executed at $1.00 or below only. However, novice investors may not be aware that this is illiquid stocks. So, they send order 70k shares at higher limit. E.g, if his order is 70k shares at price limit 1.05, then he will buy 12k shares at $1.01, 14k shares at $1.02, 17k shares at $1.03, 19k shares at $1.04 and 8k shares at $1.05. With just less than $75k, he pushes the share price up by 5%.
Similarly, if you are a seller and wants to sell 70k share, by setting low price limit, you will end up selling 10k shares at $1.00, 15k shares at $0.99, 18k shares at $0.98, 20k shares at $0.97, and 7k shares at $0.96. The price fell by 4% just by selling shares worth less than $70k.

If it takes you less than $100k to move the price up or down by more than 2%, you know that it’s easy to manipulate this stock because many people can come out with $100k easily. Someone with deeper pocket can use $500k to buy the shares, which push the price up by 20%. We are talking about individual retail investors here. Hedge fund can easily pump in a few millions to drive the price, however, most hedge funds usually don’t trade illiquid stocks.

Imagine that you have $5m. You can spend $1m to drive the price up by 10% in one day. Next day, you spend $1m again to drive the price up by 5-10%. By the time you use up $5m to buy the shares, the price could be up 50-70%. This is likely to catch the attention of novice investors. Speculative ones must be thinking what happened to this stock. Being novice and speculative, who will do fundamental analysis of the company? What they are likely to do is hit the buy button to join the bandwagon. Rising share price attracts more investors, especially those speculative ones. Buying begets more buying. Rising price begets even higher price. When the momentum is built up, the initial investors who triggered it could start selling their shares at high prices, pocketing a handsome profit. Investors late to the party will have to sell their shares to newest members joining the party. Once the momentum slows down, or investors started questioning the rising share price without supported positive newsflow or company development, doubt starts to set in. Early investors want to take profit. Some start to sell. Price starts to fall. Seeing the fall, many investors rush to quit to take profit. Selling begets more selling. Falling price begets even lower price. The rise can be rapid. The fall can be even faster. Once the momentum takes a 180 degree turn, everyone turns from buyers to sellers. You can see 10 million shares on the ask price, but only 10k shares on the bid price. What happens next is a falling knife.

So, remember, stock speculation in penny stocks is rich people’s game. Being a retail investors with limited financial resources, you are at their mercy. See the penny stock saga in earlier post.

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