DEFINITION of ‘Ghosting’
Ghosting is an illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. Ghosting is used by corrupt companies to affect stock prices so they can profit from the price movement. This practice is illegal because market makers are required by law to act in competition with each other.
BREAKING DOWN ‘Ghosting’
It is known as ghosting because, like a spectral image or a ghost, this collusion among market makers is difficult to detect. In developed markets, the consequences of ghosting can be severe.
Ghosting can be used to either drive a particular stock up or down, depending on the desired outcome. There must be a minimum of two participants involved, and those included are generally conspiring together. The goal is of mutual benefit, as those involved are looking to capitalize on the change in price for personal gain.
Market Makers and Collusion
Due to current laws and regulations, it is illegal for two firms to coordinate an event in an attempt to manipulate the market. By function, market makers are meant to be competitors and are required to act as such. Ghosting is illegal for reasons similar to those governing insider trading, as both provide investors with an unfair advantage within the marketplace.
Ghosting Versus Insider Trading
While both ghosting and insider trading give particular firms or investors the ability to profit through illegal mechanisms, they function differently. With ghosting, a change in market condition is essentially manufactured, spurred on by the sudden increase of buying or selling of a particular stock. This causes stock prices to rise or fall in response to the sudden increase in trade volume but for disingenuous reasons, as no event has transpired to instigate the change.
Insider trading gives those competitive firms informed of an actual upcoming event an unfair advantage, allowing them to buy or sell the corresponding stock prior to the new information being publicly released. The inside information can come from company employees or any third party that has particular knowledge of the inner workings of an organization and is barred from using that information for gain.
Process Involved in Ghosting
When ghosting the market, more than one firm may attempt to drive a buy or sell frenzy. This is often started by buying or selling large amounts of a particular stock by all parties included in the fraudulent activity. This sudden increase in activity often sparks similar activities in other stockholders who are unaware of the collusion. As a result, prices rise or fall dramatically, corresponding to the buying or selling frenzy respectively.