Are Liquid or Illiquid Stocks More Easily Manipulated? The Impact of Manipulator Aggressiveness

Abstract

Limit order markets are a common method for trading stocks based on the use of a limit order book to represent buy and sell orders. The issue of market manipulation is a fundamental concern both in terms of market integrity and the ability to detect manipulation cases by market authorities. This paper describes a computational limit order book model where market participants are characterised as liquidity traders, technical traders and manipulators. We simulate this limit order book behaviour and stocks of varying liquidity to determine in which of these stocks a simple pump-and-dump manipulation is easier, more profitable, and more easily detected. Here we show that it is difficult for manipulators to move the price in either very liquid or very illiquid stocks. However, more aggressive manipulators make larger profits in liquid stocks than do less aggressive manipulators, and less aggressive manipulators make more profits in illiquid stocks than do more aggressive manipulators. In addition, we show that aggressive manipulation in liquid stocks is the most profitable. Positive results using the Hurst exponent for the detection of potential manipulation are shown, and a number of future directions in the fields of stock market modelling and manipulation are proposed.