1. Chapter 12 Bluffers and Market Manipulation

2. Bluffers & Market Manipulation Fool other traders into trading unwisely. Rumormongers spread rumors Price manipulators Use example!

3. Fundamentals of Bluffing 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 well- informed speculators.

4. Bluffers Discipline Liquidity Providers 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.

5. Figure 12-1

6. Figure 12-2

7. 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.

8. Figure 12-3