Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.
Market manipulation includes (1) disseminating false or misleading information and (2) transactions that distort the price-setting mechanism of financial instruments. Information-based manipulation covers such things as spreading rumors to pump up the price of a security in order to dump one’s own shares. Transaction-based manipulation trades that artificially distort price or volume, as well as taking a dominant position in a financial instrument to influence the price of the underlying asset or a related derivative.
The CFA Institute Standards of Practice Handbook provides several examples of potential market manipulation.
- Entering an agreement with micro-cap companies to promote their stock using different, apparently independent, outlets.
- Creating the appearance of greater interest in a security by promoting it using message board accounts with multiple user names.
- Timing a report based on speculative rumors to be released at a time that the company will be unable to respond.
- Selling a holding in one fund a manager controls and buying it in another to create the impression of greater volume.
- Making an artificially high earnings estimate to force management to update guidance.
- Manipulating model inputs to artificially raise the rating of a security issue.
A grey area would be “pump priming” wherein the issuer of a new instrument contracts with brokers to provide a minimum volume for a period of time. If not disclosed, this could be a violation.