Trading Schemes: Legal & Illegal

There is a fine line between investing and gambling in the trading markets, and if you don’t know what you’re doing, even playing at online casino CA sites may be the smarter choice. No, we do not claim that trading is gambling. We just state that if you cannot perform risk and return analysis, the result will be indistinguishable. In order to make these analyzes, you need to have knowledge about the legal and illegal schemes in the trading markets first. This article will do just that and explain how the most common schemes work.

Pump and Dump

Pump and dump may be one of the oldest illegal schemes in the trading markets. Nowadays, you only see this in crypto markets because doing it in stock markets is heavily penalized. In the ’70s and ’80s, when Wall Street was almost completely independent, dump and pump schemes were commonplace. For example, if you’ve seen The Wolf of Wall Street, you’ve probably noticed this: Jordan Belfort has made an incredible fortune using pump & dumps almost exclusively. But these schemes hurt so many people that the U.S. The Securities and Exchange Commission has made legal arrangements to completely eliminate them.

The reason why this scheme has become “popular” again is crypto markets. These markets are not yet audited by any official institution, and there is no legal regulation about them. For this reason, some “tactics” that would be considered fraudulent when performed in stock markets are still used in crypto markets. Pump and Dump is one of them.

So how does this scheme work? This is actually a very simple type of fraud. It means increasing the price of a certain asset (for example, stock) by manipulative methods. When the price reaches the maximum, the person (or people) who bought a lot of that asset at a very low price sells it and makes an incredible profit. Let’s give a simple example, shall we? Let’s say there is an asset called “ABC” in the market that has no value, and there are only 10,000 of it. The asset here can be anything (stock, security, crypto, etc.) – the important thing is that it is worthless and has a limited number.

  • The fraudster buys 5,000 ABC. Since the asset price is very low yet, it is not necessary to spend a lot of money on this. For a simple example, let’s say he spends $5,000 on this purchase. This means the fraudster spent 1 USD for each asset and made a total “investment” of 5,000 USD. Remember this number.
  • After that, the “pump” phase begins. The aim at this stage is to increase the value of ABC by manipulative methods. There are many different ways to do this. Jordan Belfort was hiring hundreds of people for this, and he had these people call other people to persuade them to buy ABC. The person on the phone introduced himself as an “investment expert” and talked about what an “opportunity” ABC was. Today, this is done on Discord channels, investment forums, and in general any source where people can be manipulated. The aim is to deceive as many people as possible and make them buy ABC to increase the asset price.
  • The value of the asset naturally increases when suddenly hundreds or even thousands of people start to buy ABC, depending on the scope of the fraud. There are only 5,000 ABCs available for purchase, and suddenly each one reaches $10 in value, for example. The value of ABCs that the scammer originally owned is worth $50,000 now (remember that he only invested $5,000).
  • Sure, you can fool people, but you can’t keep it up for long. Eventually, they will realize that they have received a worthless asset. The trick is to get rid of the ABCs you originally bought before people realize this – this is called the “dump” phase. The more accurate the timing of this, the more profit you will get.
  • The scammer sells the ABCs he originally bought at the highest possible price and makes an incredible profit. The price of the remaining assets naturally decreases, and everyone loses lots of money.

Short and Distort

“Short” is the actual name of an investment type. If you believe that the value of a certain asset (for example, a stock) will decrease, you open a position on it, and if your prediction comes true (that is, if the asset value really decreases), you can make quite a profit from it. This is a completely legal investment technique.

What is illegal is that you are trying to “help” this happen. Some investors do not like to take chances after opening a short position. They start spreading rumours to make sure that the asset price will drop. For example, they may spread the rumour that the company that owns that asset is about to go bankrupt. The more convincing they are, the more successful they will be. People start selling the assets of a company they think is about to go bankrupt, and the price drops. As a result, the investor who opens a short position wins.

Short and Distort is still a tactic used in stock markets and is very difficult to prove. Those who do this do not leave any written evidence behind. Even a single phone call to the right person can spark gossip about a particular company, especially if it’s a well-known investor who makes the call. In a way, it is possible to say that it is the opposite of pump and dump because this time people are persuaded to sell instead of buying.

In 2008, a trader named Paul S. Berliner was fined (approximately 150,000 USD) for a Short and Distort scheme, and his trading license was revoked. By spreading rumours about a company called Alliance Data Systems, Berliner closed his own short position and made a huge profit. The reason why he was punished is that he spread these rumours using IM (instant messaging) applications through his own accounts. (So, ​​it was very easy to identify the culprit.) If Berliner had acted a little more carefully, it would not have been possible to prove his guilt.

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