Holding the Market
Placing or maintaining buy orders for a security whose price is expected to rapidly fall
What is Holding the Market?
Holding the market refers to a market participant (or participants) that places or maintains buy orders for a security whose price is expected to fall rapidly – or is in the process of – typically due to bad news. The purpose of holding the market is to help maintain an artificial stock price and stabilize a downtrend.
Summary
- Holding the market refers to placing or maintaining buy orders for a security whose price is expected to fall rapidly – or is in the process of – typically due to bad news.
- Holding the market is used to maintain an artificial stock price.
- The practice is extremely high risk and results in losses for the purchaser if the share price does not rebound.
The Legality of Holding the Market
When material negative news regarding a public company is released, market participants react by selling that company’s stock, resulting in a depressed share price. Holding the market is considered illegal (unless mandated by the relevant securities regulators) in numerous jurisdictions and can be viewed as market manipulation.
For example, if a company releases an earnings report that completely falls below expectations, but its share price remains steady, or even increases, with above-average trading volume, it may be due to a group of investors attempting to mislead other market participants by placing buy orders to keep the stock price up artificially.
With that said, not every instance of placing buy orders for a security and helping maintain its price in the wake of negative news is considered illegal. The key consideration is whether the buy orders were done to maintain an artificial stock price. There may be buy orders placed by investors for legitimate reasons, such as rebalancing their portfolio, hedging, etc.
Holding the Market as a High-Risk Practice
The practice of holding the market is extremely high risk and results in losses for the purchaser if the share price does not rebound. For example, if a market participant holds the market for a company that just announced its intentions to file for bankruptcy, even if the market participant can hold the share price of that company on the day of the negative news, the share price is likely to slide in subsequent days as more investors execute sell orders. The market participant would need to have extremely deep pockets to be able to “hold” the share price.
Example of Holding the Market
Background: John is the CEO of Company A, whose share price closed at $40 today. Company A is based in the United States and is to release its quarterly earnings report tomorrow, which includes a management discussion and analysis section outlining the company’s recent loss of a major customer that comprised 40% of its total revenue over the last quarter.
John anticipates that the share price of Company A will plummet once the report is disseminated. To prevent the anticipated share price slide and create an artificial stock price for Company A, John and other senior management members all agree to place significant buy orders at $40 before releasing the earnings report.
Question: Would you consider what John and his senior management team plan to do to be legal?
Answer: The basis of John and his management team in placing buy orders at $40 on Company A is to maintain an artificial stock price in the wake of a substantial share price decrease. It is considered market manipulation and, under the U.S. Securities Exchange Act of 1934, is illegal.
More Resources
CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
