Download Chapter 12 Bluffers

Chapter 12
Bluffers and
Market Manipulation
Bluffers & Market Manipulation
Fool other traders into trading unwisely.
 Rumormongers spread rumors
 Price manipulators
 Use example!
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Fundamentals of Bluffing
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Bluffers and informed speculators – They are
different! The latter has information and the
other not. Bluffers create their (false)
information.
Bluffers and value traders – They compete with
each other. Bluffers target illiquid stocks as they
are difficult to value.
Prosecuting market manipulators – Very difficult
because bluffers always claim to be wellinformed speculators.
Bluffers Discipline Liquidity
Providers
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Bluffers can trade profitably when the price
impact of their purchases is different from the
price impact of their sales.
If selling has less price impact than buying,
bluffers will buy first and then sell. See Figure
12-1.
If buying has less price impact than selling,
bluffers will sell first and then buy. See Figure
12.2.
Figure 12-1
Figure 12-2
Bluffers Discipline Liquidity
Providers-Continued
To avoid losing to bluffers, liquidity
suppliers must be disciplined when they
adjust their prices in response to trades.
 Must adjust prices so that buy and sell
orders have equal (but opposite) price
impact. See Figure 12-3.
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Figure 12-3