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Stock Price Manipulation: The Role of Intermediaries

Author

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  • Hammad Siddiqi

    (Faculty of Business, Economics, and Law, The University of Queensland, Brisbane 4072, Australia)

Abstract

We model a scenario in which there are three types of investors: fundamentalists, speculators, and trend-followers and an intermediary who cares about his reputation. Fundamentalists are rational investors with long horizons who are interested in the dividend stream. Speculators are rational investors who have short horizons and are interested in profiting from short-term price movements or capital gains. Trend-followers are behavioral investors who extrapolate price trends, and, consequently, are late entrants in the market. We show that an informed intermediary (broker) can manipulate demand (consequently stock price) without losing his reputation when there is information asymmetry. We also show that there is a trade-off between broker level competition for reputation and market liquidity. Broker level competition checks manipulation, but it adversely affects market liquidity.

Suggested Citation

  • Hammad Siddiqi, 2017. "Stock Price Manipulation: The Role of Intermediaries," IJFS, MDPI, vol. 5(4), pages 1-12, October.
    • Handle: RePEc:gam:jijfss:v:5:y:2017:i:4:p:24-:d:116367
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    References listed on IDEAS

    as
    1. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    2. Khwaja, Asim Ijaz & Mian, Atif, 2005. "Unchecked intermediaries: Price manipulation in an emerging stock market," Journal of Financial Economics, Elsevier, vol. 78(1), pages 203-241, October.
    3. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    4. Oliver D. Hart, 1977. "On The Profitability of Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 91(4), pages 579-597.
    Full references (including those not matched with items on IDEAS)

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