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?

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    There are typically no options for small trade volume stocks. For large volume stocks, you would need to pour literally billions in the market to move the stock price as you'd like to, and you probably wouldn't be able to own 'the majority' of the options either. Also, I doubt your math that you make more on the calls than you lose on the later sales - I rather think it should even itself perfectly out. So you end up needing incredible deep pockets, pay a fortune in transaction costs, and make nearly nothing at the end. - I am not a lawyer, but I don't see why it should be illegal anywhere. – Aganju Oct 22 '16 at 13:32
  • The profit you make depends on the volume of call options vs the liquidity of the underlying assets. The more illiquid the market, the better. Also, you don't need to pour billions to create a price spike that lasts a few seconds. For certain companies, I believe a couple million is way more than enough. By the way, why don't you think it's possible to own the majority of one particular call option? – equityandoption Oct 22 '16 at 17:21
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    You do realize you're buying shares and options from other entities and selling them to other entities. The quoted price is just the last transaction price, it's not like a market clerk comes out to reprice the asset, and the quoted price isn't necessarily the next transaction price. You would only be able to buy or sell a given asset if a counterparty wanted to sell or buy that asset regardless of the current quote. – quid Oct 22 '16 at 17:25
  • @Aganju pockets don't need to be as deep as you think. I explained in my answer. When you are taking advantage of inefficiences caused by market maker delta hedging, cheap options contracts will move 100x as many shares, so you can scalp. I explain more in my answer. But close to expiration you can easily get 100% moves in the options contracts at the money for just a few cent moves in the stock. – CQM Oct 22 '16 at 21:58

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.

  • What has been proposed in the question is not market manipulation as the SEC defines it. There is no attempt to deceive anyone, and the trades are all real transfers of ownership. It is ramping, which is considered market manipulation in many jurisdiction, but I'm pretty sure not in the US. The page you linked to doesn't include anything being suggested here. – David Schwartz Oct 23 '16 at 5:43

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.

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