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For example, lets say Bob owns $1m of stock in company X and Alice is his willing accomplice. The stock is currently trading at $100/share. Bob then puts out his stock up for sale at $200/share, which Alice promptly purchases. She then puts them up for $300/share, which Bob buys. Then keep going until you've reached $1000, raising the stock price 10-fold artificially.

What is the name for this tactic and what stops it from happening in practice?

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  • Who buys it for $1,000?
    – quid
    Feb 1 at 4:48
  • @quid other investors who thing that the stock is soaring sky high and want to get in on the action Feb 1 at 5:12
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In the real world called the U.S. there is something called NBBO which is the highest bid and the lowest ask on the order book. If you place an order to sell your stock at $200 then it goes on the order book and will just sit there all by itself.

If Alice comes along and places an order to buy stock at $200, her order will be filled at $100 if the size of her order is less than the number of shares available at $100. If her order size is larger, she'll buy the $100 shares and then more at the next higher price on the order book (whatever that is) and so on until her order is filled.

This scheme will work fine in some make believe world where you own all of the stock and Alice is willing pay whatever you ask for it. Or if you want to stay in reality, do an over-the-counter private trade with her. A fool and her money are soon separated?

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Scammers do this all the time with penny stocks. It's market manipulation.

Market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances with respect to the price of, or market for, a product, security or commodity.

Market manipulation is prohibited in most countries, in particular, it is prohibited in the United States under Section 9(a)(2)1 of the Securities Exchange Act of 1934

The US Securities Exchange Act defines market manipulation as "transactions which create an artificial price or maintain an artificial price for a tradable security".

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