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Chapter 12 Bluffers and Market Manipulation

Chapter 12 Bluffers and Market Manipulation. Bluffers & Market Manipulation. Fool other traders into trading unwisely. Rumormongers spread rumors Price manipulators Use example!. Fundamentals of Bluffing.

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Chapter 12 Bluffers and Market Manipulation

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  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

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