False market: 50 shades of grey

WHAT constitutes a false market for stocks? It's a seemingly straightforward question but, as with many areas relating to daily trading, numerous grey areas abound. Would month-ending or year-ending "window-dressing'' of stocks qualify? What about last-minute buying or selling of particular counters as part of "portfolio rebalancing'' because of changes to benchmark indices?

In both cases, compelling arguments can be made for the existence of a false market. For example, if the Straits Times Index suddenly shoots up or plunges because of "portfolio rebalancing'' and this induces a naive retail investor to subsequently suffer a loss because he or she hastily bought or sold believing that sentiment was suddenly shifting, that investor can quite legitimately claim to have been falsely swayed.

Yet the fact that neither examples outlined above has been the subject of an official investigation suggests that not all odd price swings are worthy of regulatory attention and that judgement plays a key role in deciding what types of false market creation are serious enough to merit investigation.