The Austrian Financial Market Authority (FMA) warns about the occurrence of share price and market manipulation of illiquid stocks by means of “hot investment tips” in market letters, online media and via social media. The author of the “hot tip” often attempts to trigger artificial demand for a stock that has a very low value or in reality is completely worthless, and to consequently manipulate their price upwards. The authors themselves have bought in at low prices, and then once an artificially achieved record price has been reached – they then release the shares into the market, and price then immediately crashes through the floor. The investors who have fallen for the “hot investment tips” and have bought the stock, then get saddled with the securities that are in actual fact worthless, and have to incur heavy losses. This share price manipulation, known as “Pump and Dump” (to inflate the price and then promptly get rid of the shares) is a forbidden practice known as “scalping”, i.e. “scalping of investors”. However, above all this practice causes massive losses in investments and losses for inexperienced and retail investors.
Market manipulation using “Pump and Dump”
There are two stages to “Pump and Dump”. In the first step, the players attempt to push the price of a security through the roof using false or misleading recommendations, having previously bought up the stock in large amounts – even if they don’t hold almost the entire share capital – for very low prices. The recommendations are disseminated via various newsletters, press releases and social networks. The recommendation to buy the stocks usually happens in a very blatant manner. “A secret tip” and “the investment opportunity of the century” are just a couple of the keywords that are frequently used. Naive investors, who are looking for investment opportunities follow these recommendations. As a result of their buying into the stock, the price of the securities increase often within a very short time.
In the second step of this manipulative activity, once the price and volume have increase as a result of artificially generated demand, then the authors of the market letters, social media recommendations and e-mails sell the stocks that they bought into prior to making the recommendations for a substantial profit.
The dumping of these large packages of shares triggers a price crash for the financial instrument. Many investors, who invested in the stock as the prices were going up, sustain substantial losses.
This form of market manipulation frequently occurs in securities that are less liquid. Such shares are frequently traded over multilateral trading facilities (MTFs). Since the market listed volume of shares is relatively small and the orderly trading activity is low, it only required a few new investors to drive the price and trading volume upwards.
Market manipulation like “Pump and Dump” constitutes an offence under penal and administrative penal law that is punished with large fines or with a custodial sentence.
How investors can protect themselves
When buying a security that is recommended in market letters, Internet platforms and forums or over social media, investors must always consider the fact that their content reflects the author’s opinion, and are often driven by the author’s own interests. How they reach their opinion should therefore be presented in a transparent manner. Where such facts have been omitted, and where the author simply announces an extraordinarily positive opinion without further justification, then the alarm bells should start to ring. This particularly applies in the case where exceptionally high target prices are given.
Journalists may address further enquiries to:
Klaus Grubelnik (FMA Media Spokesperson)
+43/(0)676/882 49 516