Market manipulation is the act of consciously and artificially causing price changes in the market, misleading others by making it look like those prices are formed by natural supply and demand, and taking advantage of such market fluctuations for one's own benefit. Such activities hinder fair price formation and cause unexpected losses for investors, and are therefore prohibited under the Financial Instruments and Exchange Act. Violators are subject to criminal prosecution or recommendation for an administrative monetary penalty payment order by the Securities and Exchange Surveillance Commission.
In order to check for unfair trading practices such as market manipulation in the cash market (Tokyo Stock Exchange) and derivatives market (Osaka Exchange), Japan Exchange Regulation (JPX-R) analyzes trading trends on a daily basis, targeting issues that have experienced sudden fluctuations in share price or trading volume, or issues for which information is provided by parties inside and outside JPX Group. All trades that are suspected of being unfair are reported to the Securities and Exchange Surveillance Commission.
This approach is referred to as "market surveillance.“ JPX-R uses a dedicated market surveillance system to identify a wide range of trades and orders that may lead to unfair trading such as market manipulation, and then conducts a detailed analysis to narrow down trades that are suspected of being unfair.
The following are examples of transactions and order types that JPX-R closely monitors as those that could lead to unfair trading such as market manipulation.
Counter trading (matching a sale or purchase with a purchase or sale from the same trading participant)
Counter trades to raise stock prices
The current price of a stock is JPY 500, but Investor A wants to sell his stocks at as high a price as possible. To achieve this:
1. He raises the stock price to JPY 505 by placing both a sell order and buy order for 10 units at JPY 505. At the same time, he places a sell order for 10 units at JPY 508, JPY 8 higher than the current price.
2. Seeing the stock price rise due to A's counter trade, a third party, mistakenly believing that the stock price will continue to rise, places a buy order, meaning A succeeds in selling his stock at a higher price (JPY 508).
POINT: We see acts that try to move the price of a stock by intentionally countering buy and sell orders from the same participant as acts that could lead to unfair trading, and therefore monitor them closely.
Counter trades to simulate active trading
The current price of a stock is JPY 500, but Investor A wants to sell her stocks at as high a price as possible. To achieve this:
1. She raises the trading volume by placing both sell and buy orders for 100 units at JPY 500 and executing them (a counter trade).
2. Seeing the increase in trading volume due to A’s counter trade, several third parties mistakenly believe that trading is active and come in to trade the stock, and when the stock price rises, A successfully sells her stocks at a higher price (JPY 550).
POINT: We consider acts that increase trading volume by intentionally countering buy and sell orders from the same participant as acts that may lead to unfair trading, and therefore monitor them closely.
Counter trades with an unbalance between buy and sell
The pre-auction estimate opening price is JPY 500. Given this, Investor A:
1. Places a market sell order for 100 units and a market buy order for 110 units and executes them at market open (a counter trade), thereby increasing the trading volume and raising the opening price to JPY 505 (effectively buying only the difference of 10 units at JPY 505).
2. Seeing the stock price rise due to A's counter trade, third parties mistakenly believe that the stock price will continue to rise and place buy orders, sending the stock price higher. A successfully sells the 10 units he purchased at market open at a higher price (JPY 510).
POINT: We consider acts that try to move the price of a stock by intentionally countering buy and sell orders from the same participant as acts that could lead to unfair trading, and therefore monitor them closely.
Counter trades after raising the closing price
With the repayment date for a margin trade approaching, Investor A wants to make a counter trade at a higher price to roll her position. To achieve this, she:
1. Places, just before market close, a buy order for 10 units at JPY 505, JPY 5 higher than the current price, and executes it, setting the closing price at a higher price (JPY 505) and thereby raising the base price for the next day.
2. Places a sell order and a buy order (both market orders for 100 units) prior to the next day's market open and executes them at market open, thereby enacting a counter trade at the raised base price (JPY 505).
POINT: We consider acts that intentionally move the stock price in relation to counter trades as acts that could lead to unfair trading, and therefore monitor them closely.
Spoofing
The current price of a certain stock is JPY 500, but Investor A wants to sell his stocks at as high a price as possible. To achieve this:
1. He makes it look like there is healthy buy interest in the stock by placing 400 units of spoof buy orders (orders which he has no intention of executing) ranging from JPY 496 to JPY 499. He also places a sell order of 10 units at the higher price of JPY 505.
2. This series of buy orders misleads others into buying stocks, thinking that the stock price will go up. This enables Investor A to sell his stock at the higher price of JPY 505.
3. Then Investor A cancels the unnecessary buy orders.
POINT: We see "spoof" orders which the trader has no intention of executing as acts which could lead to unfair trading, and therefore monitor them closely.
Spoofing before the opening auction
The expected matching price before the opening auction is JPY 500, but Investor A wants to sell her stock at as high a price as possible. To achieve this:
1. She raises the expected matching price to JPY 505 by placing 100 units of a "spoof" market buy order (an order which she has no intention of executing) before the opening auction. She also places 10 units of a sell order at JPY 505, JPY 5 higher than the original expected matching price.
2. Investor A's market buy order (a spoof order) misleads others into buying the stock, thinking that the stock price will go up. Investor A then cancels the unnecessary market buy order immediately before the opening auction.
3. This enables Investor A to sell her stock at JPY 505 at the opening auction.
POINT: We consider "spoof" orders which the trader has no intention of executing and acts with the intention of fluctuating the expected matching price as acts which could lead to unfair trading, and therefore monitor them closely.
Spoofing intended to discourage orders
The price of a certain stock is JPY 500, but due to another investor's hikenari order (a market order to be executed at the closing auction), the expected matching price at the closing auction is expected to rise to JPY 505. Seeing this, Investor A:
1. Artificially keeps the expected matching price at the closing auction at the current price of JPY 500 by placing 100 units of a "spoof" hikenari order (an order which he has no intention of executing). This puts other investors off placing orders. Investor A buys 10 units of the stock at the current price, JPY 500.
2. Investor A then corrects his spoof hikenari sell order of 100 units to 10 units, and the expected matching price at the closing auction goes up to JPY 505 again.
3. This enables Investor A to sell his 10 units of the stock at the higher price of JPY 505.
POINT: We consider "spoof" orders which the trader has no intention of executing and acts which are intended to fluctuate the expected matching price as acts which could lead to unfair trading, and therefore monitor them closely.
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