https://newsroom.unsw.edu.au/news/business-law/three-useful-thing...

https://newsroom.unsw.edu.au/news/business-law/three-useful-things-know-about-stock-market-manipulation
As the SEC investigates social media posts for GameStop manipulation, UNSW Business School's Mark Humphery-Jenner says it is important to remember that market manipulation is illegal.

1. What are manipulative – and illegal – trades?

Manipulative trading involves trading in a company’s shares just to create an artificial price or to create the appearance of volume. Buying shares just to move prices is illegal. Shorting shares to move prices is illegal. This is the case in myriad countries, for example under Section 9(a)(2) of the US Securities Exchange Act of 1934 and Section 1041A of the Australian Corporations Act 2001.

3. Why is market manipulation illegal?

There are good policy reasons to prohibit market manipulation. The following is a non-exhaustive list.

Fairness to the victim: It is inherently unfair to the person who is manipulated. This is the case whether it is a hedge fund or not. That hedge fund is still funded by people’s hard-earned money. An “eat the rich” mentality is fallacious at best. While people might feel morally justified, they are no more justified than people storming the US Capitol. Both acts are illegal regardless of what one convinces oneself is “right”.

It is even more egregious when the victim is a retail investor, as is often the case. If “ramping” behaviour forces up prices, then retail investors who get caught up in the excitement ultimately lose when prices crater towards reality. The “eat the rich” crowd appear to treat such victims as mere collateral damage.

Confidence in markets: An efficient market in which people have confidence that they will not be deceived is essential for market participation. This is a corollary of the first point. People will shy away from financial markets if they believe that they will be defrauded. This is the case even when the people doing the fraud are 'wannabe freedom fighters'. Ultimately, the reduction in participation will make it more difficult for people to use the market as a store of value, or for corporations to use the market to raise capital.

Capital allocation reasons: Correct prices are essential for capital allocation. If prices are incorrect, then overpriced firms will see it attractive to issues shares at their overpriced level. But, underpriced firms will simply shy away from markets. Thus, even if two such firms have the same intrinsic value, one will be bought out of the market, and the other will raise capital at a price that is too high. The investors in the first company stand to lose when it emerges that the firm’s prospects are not as good as were hyped. But, ultimately everyone loses because capital is not correctly allocated, thereby stymying aggregate corporate growth.

Implications for other assets: Correct prices have follow-on implications. Share prices ultimately impact prices of other derivatives, such as options (i.e., puts and calls). These derivatives, and their characteristics, are often used in other fundamental matters such as bankruptcy prediction, following the seminal works of Nobel Laureate Robert Merton. But, should prices be incorrect, the other implications are incorrect. This impacts the broader economy as it then impacts lending. In turn, this impacts aggregate economic growth.

What should be done?

It is clear that many people do not understand trading rules. Some are willfully ignorant. Some simply are not aware. The only solution is to enhance financial education. This can include high school education or compulsory university education from qualified financial experts.

Brokers must also play a role in stamping out manipulation. This can involve halting trading when suspicious trading activity is detected. This could be market-wide or individual-specific if it is clear that the individual is trading in the aforementioned proscribed ways. But, it must also involve requiring traders to at least do a short course on market manipulation, thereby forcing traders to acknowledge, recognise, and agree to abide by market rules.

If market manipulation runs rampant, we all lose. Market manipulators are not freedom fighters. Market manipulators are not altruistic revolutionaries.