Is this legal: going long on call options and artificially increasing the price of the underlying asset seconds before expiration?

Question

Let's say I bought a particular call option and own the majority of it.

On the very last second (before the expiry date, seconds before the market closes), if I bought every single offer in the underlying market, the price would sharply spike upwards and since the call option expires immediately afterwards, I would generate massive amounts of profit from that.

On the next day the market opens, I would have to sell the shares I bought for a loss, but this is negligible compared to the profits I made from my call options (this can also be prevented, as I will explain later on).

Now, there is a risk that the stock price would go way down below the strike price, but this could be simply solved by shorting futures to hedge my position. So in the case it goes, down I simply do not exercise my option and profit from the future, losing a tiny amount of premium.

Additionally, the volume required to buy every single ask offer in a few seconds is negligible compared to the profit you will have at the expiry date from the call option.

Previously, I said I would lose money when I sell my shares back, but this can also be prevented. When I was buying all the shares in the equities market, I can also short futures in order to hedge my position. Of course, this has to be precisely timed and calculated such that the average cost of buying equities equal the average cost of shorting futures, but with some effort, this can be done. Another idea I have is to arbitrage the future market by going long on future since you have insider-like information by knowing that the price of the underlying asset will go up.

In my opinion, this seem like a really questionable way to make massive amounts of money. So my question is, is this legal, and if so which law prohibits this and from what state/country?

Answer 1

Despite the fact that I think there is a litany of inaccuracies and misunderstandings related to quoted price and transaction price and the way prices move and assets transact; if you were able to, under these extremely narrow and very unlikely conditions, affect the prices of these assets that would be market manipulation in the eyes of the SEC.

Link to the SEC page about market manipulation.

Answer 2

This can be done, you can be prosecuted for some forms of it, in any case there are more riskless ways of doing what you suggested.

First, buying call options from market makers results in market makers buying shares at the same delta as the call option. (100 SHARES X DELTA = How many shares MM's bought). You can time this with the volume and depth of the shares market to get a bigger resulting move caused by your options purchase to get bigger quote changes in your option. So on expiration day you can be trade near at the money options back and forth between being out the money and in the money. You would exit the position into liquidity at a profit. The risk here is that you can be sitting on a big options position, where the commissions costs get really big, but you can spread this out amongst several options contracts.

Second, you can again take advantage of market maker inefficiencies by getting your primary position (whether in the share market or options market) placed, and then your other position being a very large buy order a few levels below the best bid. Many market makers and algorithms will jump in front of your, they think they are being smart, but it will raise the best bid and likely make a few higher prints for the mark, raising the price of your call option. And eventually remove your large buy order. Again, you exit into liquidity. This is called spoofing. There have been some regulatory actions against people in doing this in the last few years.

As for consequences, you need to put things into perspective. US capital market regulators have the most nuanced regulations and enforcement actions of worldwide capital market regulators, and even then they get criticized for being unable or unwilling to curb these practices. With that perspective American laws are basically a blueprint on what to do in 100 other country's stock exchanges, where the legislature has never gotten around to defining the same laws, the securities regulator is even more underfunded and toothless, and the markets more inefficient.

Not advice, just reality.

Answer 3

Let's say I bought a particular call option and own the majority of it. On the very last second (before the expiry date, seconds before the market closes), if I bought every single offer in the underlying market, the price would sharply spike upwards and since the call option expires immediately afterwards, I would generate massive amounts of profit from that.

Owning the majority of a particular call option is non specific so I'm going to assume that they're all at the same strike price.

If these long calls are OTM, you need to buy enough stock to drive them ITM otherwise they'll expire worthless. That will mean no profit per call until they go ITM so you're burying a lot of money in the stock with no gain in the calls. That's about where this stops making sense.

But let's pretend some more. Let's assume that the call is at least ATM. Assuming that your pockets are deep enough to be able to move share price, you buy shares, driving share price up and call price as well.

Because it's expiration, you can't sell your appreciated calls because you bought the underlying "seconds before the market closes". You had no off ramp to sell your appreciated calls. So now what happens?

On the next day the market opens, I would have to sell the shares I bought for a loss, but this is negligible compared to the profits I made from my call options.

Aside: In the US, if an option is one cent or more in-the-money (ITM) at expiration, the Option Clearing Corp will automatically exercise options whether they are long or short. This is called Exercise by Exception.

Furthermore, since they're ITM, when they are automatically exercised by the OCC, you will then purchase even MORE stock, at the strike price.

There are a lot of other what ifs in this, mainly directional market risk. And the idea of hedging this with futures is just another invitation for potential disaster because the equity position and the futures position can move in opposite directions. The viability of the hedge is another faulty assumption.

Your entire strategy is flawed.