The Manipulator's Poker: Order-Based Manipulation in the Chinese Stock Market

Abstract

This paper investigates order-based manipulation, a new type of market manipulation, and its effects on investors’ behavior and market efficiency. Using a unique dataset on an order-based manipulation case from the Chinese stock market, we show the following: 1) order-based manipulation affects market liquidity and trading behaviors; 2) the manipulator pretends to be an informed trader or expects to be looked at as informed by choosing a “right” time; and 3) the manipulation rapidly changes investors' reactions to the market order/depth imbalance in the short run, and the effect gradually drops during the post-manipulation period. Our results are robust compared with alternative measures, and they offer clear implications for both theory and policy.

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