Daily Management Review

High Stock Priced Companies Are At Risk Of ‘Market Manipulation’


07/17/2017


Many experts agree that it all boils down to the “number” irrespective of “market cap” when it comes down to the vulnerability to market manipulation.



The shares of Alphabet and Amazon soaring near “$1000”, has given rise to numerous debate concerning the introduction of a split in the stocks especially keeping in mind the “benefit of retail investors” wishing to “buy at lower prices”. Nevertheless, one needs to factor in the risks of “potential market manipulation” due to high prices of stock, thinks Trillium’s general counsel, Michael Friedman.
 
While Eric Chemi added:
“Friedman is a securities lawyer and a software designer who wrote a software program to detect manipulation”.
 
Friedman's conclusion is that the size of the stock is the determining factor as mostly high stocks prices results in “very thin” “order books”. As a results, options over offers and bids available in the market narrows down considerable, while a “single trade can bump the price around”.
 
More the number of bumps open up more doors to manipulation affecting “layering and spoofing”, artificial orders get cancelled before the execution. In fact, various other experts also agree with Friedman that “thinly traded stocks are ripe for such problems”. Therefore it is not about the “market cap” rather the “number of shares” that are being traded. Friedman’s statement to CNBC confirms that:
“…exchanges operate best when stocks are between $20 and $80, optimizing the order book and efficiency across other trading platforms. Because stock prices can only move 1 penny at a time, Friedman says the ideal stock price is one that allows for a reasonable number of shares to trade at each penny level”.
 
 
References:
http://www.cnbc.com







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