Nerds on Wall Street: Math, Machines, and Wired Markets

11.2. A Classic Market Manipulation

The ignoble history of stock market manipulations doubtless goes back to the most ancient markets. In one of the earliest accounts of manipulations, Joseph de la Vega, in Confusión de Confusiones, wrote of the Amsterdam Stock Exchange over 300 years ago (1688):

The greatest comedy is played at the Exchange. There, ... the speculators excel in tricks, they do business and find excuses wherein hiding places, concealment of facts, quarrels, provocations, mockery, idle talk, violent desires, collusion, artful deceptions, betrayals, cheatings, and even tragic end are to be found.^[]

In the Amsterdam market at the time, market manipulations were common. De la Vega provides a comprehensive model of the various manipulations used to trick unsuspecting investors, including early versions of such perennial favorites as "painting the tape"^[], making small trades to move the price. De la Vega's book, Confusión de Confusiones, was picked by the Financial Times as one of the 10 best investment books ever written.^[]

^[] Painting the tape is the illegal practice in which traders buy and sell a specific security among themselves, in order to create an illusion of high trading volume. Traders profit when unsuspecting investors, lured in by the unusual market volume, buy the stock.

In the Amsterdam market of the late 1600s, there were two active stocks—the Dutch East India Company and the Dutch West India Company—and most of the activity revolved around speculation ...