The New Market Manipulation
62 Pages Posted: 6 Jul 2017 Last revised: 4 Aug 2017
Date Written: July 3, 2017
Markets face a new and daunting mode of manipulation. With this new mode of market manipulation, millions of dollars can vanish in seconds, rogue actors can halt the trading of billion-dollar companies, and trillion-dollar financial markets can be distorted with a simple click or a few lines of code. Every investor and institution is at risk. This is the new precarious reality of our financial markets.
This Article is about our ominous financial reality, this dangerous new mode of market manipulation, and the need for pragmatic policies to better address the rising threats to manipulate our financial markets. To start, the Article offers an overview about the recent rise and regulation of new financial technology. It begins with a close examination of The Flash Crash of 2010 and the publication of Flash Boys by Michael Lewis. Next, the Article surveys the changing landscape of market manipulation. It identifies traditional manipulation methods like cornering, front running, and pumping-and-dumping, as well as new manipulation methods like spoofing, pinging, and mass misinformation. It explains how new cybernetic market manipulation schemes that leverage modern technologies like electronic networks, social media, and artificial intelligence are more harmful than traditional schemes. The Article then grapples with why this new mode of market manipulation will present critical challenges for regulators. Finally, it recommends three pragmatic proposals for combating the new threats of cybernetic market manipulation by improving intermediary integrity, enhancing financial cybersecurity, and simplifying investment strategies. Ultimately, this Article provides an original and improved framework for thinking and acting anew about market regulation, market operations, and market manipulation.
Keywords: market manipulation, fin-tech, financial technology, financial fraud, securities fraud, securities regulation, financial regulation, algorithmic trading, high frequency trading, systemic risk, artificial intelligence, cybercrime, flash crash, fake news, Flash Boys, LIBOR
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