Stock Manipulation Short Selling

When Bear Stearns collapsed in 2008, some said it was chiefly because of short sellers, and not so much the firm's mortgage-backed securities.

A short sale occurs when a trader borrows shares, which he then sells. The loan is repaid for less money if all goes well.

Share prices rise and fall as a firm's earnings move, but other influences move stock, including speculation about where the company is heading.

To intentionally manipulate security prices is illegal. But Wall Street pros believe short-selling raids do occur. Two experts have described their theory of how such manipulation may have worked with Bear Stearns.

Wharton finance professor Itay Goldstein. and Alexander Guembel of the Saïd Business School and Lincoln College at the University of Oxford described the procedure in their paper entitled, "Manipulation and the Allocational Role of Prices."

Their finding claimed traders purposely drove the Bear Stearns stock price down and undermined the corporation’s reputation and condition, and caused the share price to fall sharply. Goldstein and Guembel found that such intent works when the idea is to damage a firm; Ordinary traders do not have the same power.

Bear Stearns was finally sold out to the Chase Bank after corporate damage was accomplished by the poor market psychology of this short selling.