Ghosting

What Is Ghosting?

In finance, ghosting refers to an illicit practice where two or more market makers secretly collaborate to influence a stock price. This form of market manipulation aims to artificially drive a stock's price either higher or lower, allowing the colluding parties to profit from the manufactured price movement²¹. Unlike legitimate trading based on supply and demand, ghosting involves orchestrated buying or selling frenzies that mislead other market participants. This practice is considered illegal because it violates the fundamental principle that market makers should compete, not engage in collusion.

History and Origin

While the term "ghosting" has gained colloquial use in broader contexts to describe the sudden cessation of communication, its application within finance specifically denotes a clandestine form of market manipulation. The practice itself, involving coordinated efforts to influence security prices, has likely existed in various forms throughout the history of financial markets. However, the specific label "ghosting" for this particular type of illegal collusion among market makers appears to be a more modern descriptor. Its essence lies in the hidden nature of the coordinated activity, where the investing public remains unaware of the connivance among entities that are expected to be competitive²⁰. Regulatory bodies continually adapt their oversight to detect and deter such surreptitious activities, highlighting the ongoing challenge of maintaining fair and transparent markets. FINRA Rule 2090, known as the "Know Your Customer" (KYC) rule, mandates that financial institutions exercise reasonable due diligence to gather and retain essential facts about their customers, which helps prevent fraudulent activities like ghosting¹⁹.

Key Takeaways

• Ghosting is an illegal form of market manipulation involving secret collusion among market makers to influence a stock's price.
• The objective of ghosting is to create artificial buying or selling pressure, leading to price movements that benefit the colluding parties.
• It is difficult to detect due to its clandestine nature, making enforcement challenging for regulatory bodies.
• Ghosting undermines market integrity and fair competition, posing risks to investor protection.
• The practice is subject to strict securities laws and regulatory actions.

Formula and Calculation

Ghosting does not involve a specific mathematical formula or calculation. Instead, it is a qualitative description of an illegal, collusive behavior. There is no quantifiable metric to determine the "degree" of ghosting, as its existence itself signifies a violation. The focus is on identifying the patterns of trading and communication that indicate a coordinated, undisclosed effort to manipulate trading volume and price.

Interpreting the Ghosting

Interpreting ghosting involves identifying suspicious trading patterns and behaviors that suggest collusion rather than genuine market activity. When two or more market makers are observed making large, coordinated buy or sell orders in a specific stock, leading to rapid and unexplained price shifts, it could be indicative of ghosting. Analysts and regulators look for unusual spikes or drops in trading volume that lack corresponding public news or fundamental changes in the company. Such activities, especially when followed by profiting from the artificial price movements, are critical indicators. The essence of ghosting lies in the deceptive creation of artificial market conditions, designed to trick other investors into following the manipulated trend. Understanding ghosting requires a keen eye for anomalous market behavior and a deep understanding of standard market protocols.

Hypothetical Example

Imagine two major market makers, "Alpha Securities" and "Beta Capital," secretly agree to manipulate the stock of "Tech Innovations Inc." (TII). TII's stock has been trading steadily around $50. Alpha Securities begins aggressively buying a large volume of TII shares over a short period, creating significant upward pressure on the stock price. Simultaneously, Beta Capital also places large buy orders for TII, mirroring Alpha's actions. This coordinated buying spree, which appears to be a sudden surge in demand, drives TII's stock up to $60. Other investors, observing the rapid price increase and high trading volume, mistakenly believe there is legitimate positive news or strong interest in TII, and they start buying as well, further inflating the price. Once the price reaches a pre-determined target, Alpha Securities and Beta Capital then begin to sell their accumulated TII shares, profiting from the artificially inflated price before the market corrects. This coordinated, undisclosed action to create a false impression of market activity is an example of ghosting.

Practical Applications

Ghosting, as an illegal practice, has no legitimate practical applications in finance. Instead, understanding it is crucial for regulatory bodies and financial institutions to uphold market integrity and enforce securities laws. From a regulatory standpoint, knowledge of ghosting helps in the development of surveillance systems and compliance programs designed to detect and prevent such collusive activities. For example, the Financial Industry Regulatory Authority (FINRA) enforces rules like "Know Your Customer" (KYC) (FINRA Rule 2090), which require firms to gather essential information about clients to prevent illicit activities and ensure suitable recommendations based on their risk tolerance and investment objectives. This aids in identifying unusual or suspicious trading patterns that might indicate ghosting or other forms of market manipulation¹⁸.

In a broader sense, "ghosting" can also describe the phenomenon of individuals disengaging from their own financial responsibilities, such as ignoring bills, neglecting investment accounts, or failing to track their spending. This behavioral "ghosting" can lead to significant financial detriments. For instance, when individuals fail to maintain contact with financial institutions regarding their accounts, those assets may eventually become unclaimed property and be escheated to the state¹⁶, ¹⁷. State Controller's Offices, such as that in California, manage billions of dollars in such forgotten funds, actively working to reunite owners with their assets¹⁴, ¹⁵. This form of financial avoidance can be a significant challenge for consumers and contributes to widespread apathy towards financial services, as highlighted by reports on consumer trust in the financial industry¹³. The Consumer Financial Protection Bureau (CFPB) provides resources for consumers dealing with financial obligations, including guidance on debt collection, aiming to help individuals avoid adverse outcomes from disengagement¹¹, ¹².

Limitations and Criticisms

The primary limitation of addressing ghosting as market manipulation is its inherent stealth. By definition, ghosting relies on covert collaboration, making it difficult for regulators to detect without extensive surveillance and analysis of trading volume and communication patterns. Even when suspicious activity is identified, proving illegal collusion can be challenging, often requiring evidence of communication or agreement between the colluding parties. This difficulty in detection and prosecution means that instances of ghosting may go unpunished, undermining the fairness and efficiency of financial markets. Critics of market surveillance mechanisms often point to the continuous cat-and-mouse game between manipulators and regulators, where sophisticated schemes can always find new ways to exploit loopholes or operate under the radar.

Separately, the behavioral concept of "ghosting" one's personal finances also presents significant limitations. While individuals may avoid financial matters due to fear or overwhelm, this avoidance can lead to missed opportunities, accumulating debt, and forfeited assets. For example, ignoring financial statements can result in unclaimed property being turned over to the state, requiring a claims process to recover⁹, ¹⁰. The psychological inertia to address financial problems can perpetuate negative cycles, as avoiding financial realities rarely leads to positive long-term outcomes⁷, ⁸. Furthermore, financial institutions face challenges when clients become unresponsive, impacting their ability to provide effective service and fulfill their compliance obligations⁵, ⁶.

Ghosting vs. Insider Trading

While both ghosting and insider trading are illegal practices that undermine the integrity of financial markets, they differ fundamentally in their mechanisms and the type of unfair advantage they exploit.

The key distinction is that ghosting involves manufacturing a change in market conditions through coordinated, disingenuous trading, whereas insider trading involves trading on pre-existing, non-public information.

FAQs

What are the consequences for market makers engaged in ghosting?

Market makers caught engaging in ghosting face severe penalties under securities laws. These can include substantial fines, disgorgement of illicit gains, suspension or revocation of licenses, and even criminal charges³. Regulatory bodies like FINRA actively monitor trading activities to identify and prosecute such illicit behaviors, emphasizing the importance of compliance.

How can investors protect themselves from ghosting?

While individual investors cannot directly detect or prevent ghosting, they can protect themselves by practicing due diligence and avoiding impulsive decisions based on sudden, unexplained price movements or high trading volume. Diversifying investments across various asset classes and not chasing hot stocks solely based on rapid price increases can also mitigate risks from market manipulation. Investors should always consider their risk tolerance and investment objectives.

What is "ghosting" in personal finance?

In personal finance, "ghosting" refers to the act of intentionally avoiding or ignoring one's financial responsibilities or situations. This can manifest as not opening bills, neglecting bank account balances, or delaying contact with financial institutions about debts or forgotten assets. This behavioral "ghosting" is a form of conflict avoidance and can lead to issues such as accumulating debt or having assets classified as unclaimed property¹, ².