Bioelectronics Corp (BIEL)

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Market Makers’ Methods of Stock Manipulation
B y A.J. Cataldo , P H .D., CMA, CPA, and Larry N. Killough , P H .D., CPA

A market maker, who handles small-sized and microcap stocks; an exchange floor specialist, who is involved with mid-sized or large-capitalized stocks; or a broker-dealer, who handles all stocks, performs two separate and, apparently, incompatible functions.

First, all maintain an inventory of the stocks their firms have underwritten, continue to trade, or make a market in. They buy and sell these inventories for profit. In theory, they will buy low, which reduces the decline in price per share (PPS), and sell high, which reduces the rise in PPS. Therefore, these profit-making behaviors are presumed to provide a stabilizing effect on changes in the PPS of the stocks they make a market in.

Second, they post the bid and ask prices at which others are willing to buy or sell and match incoming buy and sell orders. In return for performing these functions, market makers or specialists generate revenue for their firm through various order-flow or transaction-fee schemes.

But like the conflicts apparent in the dual role of an analyst-broker or auditor-consultant, the broker-dealer is faced with an opportunity to sell his or her firm’s inventory before others in a declining market or buy for his or her firm’s inventory before others in a rising market. This practice is one form of market maker manipulation. It is illegal, difficult to detect, but alleged in many instances—both correctly and, often, incorrectly—on Internet stock-chat message boards. One relatively highly publicized example of MMM is referred to as front running.

In front running, specialist market makers use their knowledge of private, incoming order-flow information revealed by limit orders to generate monopolistic trading profits. Though front running per se may not be particularly damaging to your firm, it illustrates the abuse of the conflicting roles of the broker-dealer as both a facilitator of an orderly market (matching incoming orders from other investors to buy and sell) and as someone with the desire to generate profits from the
inventories traded for their firm’s account.

Another type of market manipulation is the naked short sale. Firms with a declining PPS are targeted for naked short selling. This practice is very damaging to
the publicly traded firm and may be popular among the off shore brokerage firms where U.S. securities laws are less easily enforced or do not apply. It is similar to the counterfeiting of currencies. In a naked short sale of stock, short positions are not declared or disclosed, shares are not borrowed to cover the short sale, and the stock is never delivered to the purchaser. The result is dilutive in that it results in an artificial, unauthorized, and illegal increase in the number of shares issued and outstanding and in a manipulated decline in the PPS of the firm’s stock. The broker-dealer merely floods the market with cheap, nonexistent shares of your firm’s stock. The seller of these nonexistent shares keeps the proceeds.

Read full article here, https://www.imanet.org/-/media/4c6c7650a0024853a1c61963d7865649.a