5.1 billion won.
That is the number that the chairman of CNK International Ltd gained personally through selling his shares of stock after manipulating the price of his own company.
The definition of stock manipulation is the attempt or act of artificially changing the price of a security or a market movement with the intent to make a profit. The stock prices are supposed to be set by the completely autonomous movement of the supply and demand, which is called efficient market. However, those acts that cause artificial change of stock prices hinder the process of reasonable price setting, thus reducing the market participants’ total utility. It needs to be strictly regulated and exiled out of the market.
Stock manipulation has existed since the advent of stock markets. Knowing the repercussions of stock manipulation on the market, there have been many attempts across the world to develop proactive measures to root it out and punish those who try to create false alarm within the market. However, due to the complex stock market system, not only is finding out the epitome of those acts in advance incredibly hard, but estimating an accurate range of the involved associates and resources for penalties is very difficult.
Let’s dig into more details to see what types of manipulation there are. Manipulation on the whole has three main categories – market price control, false information dissemination, and utilizing inside information.
First, market price control, aka ‘Operation’. Manipulation on the stock price of Lubo, a gears and driving related parts manufacturer, epitomizes this category. The manipulators stacked up approaching 150 billion won through 700 borrowed-name accounts and a pyramid structure to raise the price from 1,200 won to 50,000 won. However, once the prosecution swooped in for a scrutiny, the price began to freefall, making countless victims (mostly private investors).
The second category is spreading false information that could make the outlook of a company or an industry seemingly profitable in the future so as to raise the prices. After spreading the rumor whether it’s backed by solid ground or not, they sell the stock at the peak to maximize the profit. This type of manipulation often used to happen with resource development stocks since Korea imports most of its energy sources from abroad. A most recent example of this type is CNK international Ltd, resource development corporation. As mentioned in the beginning of the article, they had their price soar from 3,000 won to 17,000 won in a short period of time by spreading the news that diamond mining in Cameroon would be instigated, which later turned out to be false. The stock price plummeted drastically after the truth was revealed. Spreading false information or rumors via internet media or professionals also falls into the same category.
The last category is harnessing the power of inside information. This type doesn’t discriminate between favorable and unfavorable factors in the market since manipulators could benefit from either of them. Before disclosing updated news of a listed company to the public, insiders either buy or sell the shares of stock depending on the news. And they obtain easy money from the fluctuation of the price that the news brings about.
After having examined a few examples of stock manipulation, we can see that it has only negative effects upon the market. Not only does it distort the mechanism of efficient price setting, but it sabotages the process of trust accumulation of the market. To prevent any type of manipulation from happening, it’s imperative that the government take the lead on removing impurities from the market with a strong collaboration of all associated institutions. Since the new administration made a clear emphasis on strengthening oversight to root out unfair transactions, all relevant governments have scrambled to deliver the will. The FSS will reinforce the TF team with professionals who have abundant experience in the market with direct support from the FSC. This reinforcement is expected to help enable more resilient and proactive moves against any potential unfair transactions. With strong monitoring and clear regulations upon the black hand, I hope all market participants enjoy the fruit they could attain reasonably without worrying about any distortion in the market.
Sang Hee Yu