Recent Advances of Exception Mining in Stock Market - Evolving Application Domains of Data Warehousing and Mining - page 215

Table 1. Market manipulation

Types of Manipulation Descriptions

Corner Buying up a substantial volume of a security in order to manipulate the price.

Matched Orders A person buys a security and subsequently places buy and sell orders for that security at the same time.

Pools Same as a matched orders. Involving more than two parties trading on the basis that the transaction will be

reversed later.

Wash trade Buyer is also seller or is associated with seller. There is no change in the beneficial ownership of the securi-

ties.

Marking the close Buying or selling securities or derivatives contracts at the close of the market in an effort to alter the closing

price of the security or derivatives contract.

Market Stabilisation Trading in a security at the time of a new issue in order to prevent a decline in the price of the security.

Parking and Warehousing Hiding the true ownership of securities

Pump & dump/Ramping Buying at increasingly higher prices. Securities are sold in the market (often to retail customers) at the

higher prices

Short Selling A market transaction in which an investor sells stock he does not have or he has borrowed in anticipation of

a price decline.

result, each of them was sentenced two months
imprisonment suspended for 12 months.
In general, stock market manipulation can
be classified into trade-based market manipula-
tion and information-based market manipulation
(Aggarwal & Wu 2006). The information-based
manipulation is defined as disseminating false
information which misleads other participants
about the value or trading volume of a security.
Trade-based market manipulation refers to the
buying or selling of a security which aims to
mislead or deceive other participants about the
value or trading volume of the security. There are
a variety of strategies of market manipulation, and
the most important types of market manipulations
are shown in Table 1 (Schinasi et al. 1999).

• Step 1. Generating Alerts: Generating

alerts is the start of a stock market surveil-
lance process. The exchanges monitor the
transaction records and generate alerts if
there are suspicious trades identified. The
technology of generating alerts plays an
important role on the efficiency of surveil-
lance and in the whole process of stock
market surveillance (Smith 1995).

• Step 2. Analyzing Alerts: This step is done

by regulation staff. The alerts generated
are reported to regulators. The regulators
analyze the alerts and replay the historical
transaction records. If they think the alert
are really suspicious, then a case investiga-
tion will be started. Otherwise, the alerts
will be ignored (Brown & GoldSchmidt
1996).

Market Surveillance Process

• Step 3. Case Investigation: This step nor-

mally spends a long time to enquiry the
persons involved. The regulators have to
find adequate evidence to validate that the
suspicious parties have committed illegal
behavior. The persons involved need to
give reasonable explanation for their trades
or behaviors in stock markets.

A qualified surveillance function is expected to
capture all the anomalies from a large amount of
complex market records, while avoiding false
alerts so as to reduce the waste of time and human
resources on the investigation of alerts (Buta &
Barletta 1991). It consists of the following four
steps.