Jane* opened a trading account with her bank’s discount brokerage last summer. She already has an RRSP, and considers this account her “fun money.” She trades in higher risk stocks, and even decided to try buying on margin – meaning she borrowed money against the value of her portfolio to buy more shares.
A few weeks ago, the markets dipped, and her portfolio decreased in value. So much so that she received a “margin
call.” She needed to deposit a minimum of $500 to keep her account in good standing. Before she made the transfer, she happened to be chatting with her brother, Dick.*
“Don’t worry about it,” Dick said. “Let me show you a trick my friend showed me.”
“You own some shares that trade in pretty low volumes. Log on at the end of the day, just a few minutes left, and enter a bid at a higher than market price. It is not likely to fill, but as the last bid of the day it will raise the closing price on the shares – which will raise the value of your portfolio, and you will no longer have a margin call.”
“Really?” asked Jane. “Is it that easy?”
“Absolutely, said Dick. “People do it all the time. Works like a charm.”
So Jane entered her late day order, the closing price went up, and she didn’t have to deposit any additional funds to her account. She did this for the next four days, at which point the market recovered and her margin was no longer a concern. A few weeks later, when prices fell again, she did the same.
Only this time, she was shocked to get a call from the Securities Commission, who said her account had been red-flagged by market surveillance. They wanted to talk to her about suspicious trading activities.
What had Jane done wrong?
While she may not have realized it was wrong, Jane had been using her account to intentionally manipulate market prices. According to securities laws, any orders must be entered with an intent to trade. Jane had no interest in buying the shares – only in driving the price up. Her actions were therefore in contradiction to the Securities Act, and could lead to an investigation and proceedings by the Securities Commission.
It is important for anyone trading on their own behalf to be aware that they must abide by the same rules as professional traders. Ensure that you are aware of the rules in your jurisdiction.
You may also want to consider taking an investing course, such as the Canadian Securities Course – a small investment for some valuable knowledge.
Do you trade online? Are there rules or scenarios you are unsure of? Please feel free to ask. We will do our best, with Dick and Jane’s assistance, to answer your questions.
*Dick and Jane are fictional characters. The scenario however is not that uncommon.