1.A Review of the Manipulation Literature Market manipulation is an issue that is almost as old as the earliest speculative market The prevalence of"pump and dump"or"dump and cover"strategies was widely reported in financial press at the beginning of the 17h century when the Amsterdam Stock Exchange was founded.Even though market manipulation might be much more severe in the early years of financial markets,it is too early to say that manipulation is no longer of importance.In modern financial markets,manipulations are often taken in hidden ways that cannot be easily detected and outlawed.In many emerging markets where market regulations are weak,manipulation is still quite rampant.3 Even in the relatively well- regulated US market,Aggarwal and Wu (2003)have documented hundreds of cases of price manipulation in the 1990s. Following Allen and Gale (1992),we classify manipulation into three categories: information-based manipulation,action-based manipulation,and trade-based manipulation. Information-based manipulation is taken by releasing false information or spreading misleading rumors.The operation of"trading pools"in the United States during the 1920s gives examples of information-based manipulation.A group of investors would combine to form a pool:first to buy a stock,then to spread favorable rumors about the firm,and finally to sell out at a profit.The striking cases of Enron and the Worldcom in 3 For example,China's worst stock-market crime in 2002 was a scheme by seven people, including two former China Venture Capital executives,accused of using $700 million and 1,500 brokerage accounts nationwide to manipulate the company share price. 4 An example of information-based manipulation is the case of Texas Gulf Sulphur Company in the 1960s(Jaffe 1974).In late 1963 drillings by its engineers struck huge mineral deposits. Between November 1963 and mid-April 1964,company officials tried hard to convince the public that the opposite was true,by falsifying evidence,while accumulating company shares and options.On April 12,1964,the company even issued a press release stating that the technical 55 1. A Review of the Manipulation Literature Market manipulation is an issue that is almost as old as the earliest speculative market. The prevalence of “pump and dump” or “dump and cover” strategies was widely reported in financial press at the beginning of the 17th century when the Amsterdam Stock Exchange was founded. Even though market manipulation might be much more severe in the early years of financial markets, it is too early to say that manipulation is no longer of importance. In modern financial markets, manipulations are often taken in hidden ways that cannot be easily detected and outlawed. In many emerging markets where market regulations are weak, manipulation is still quite rampant.3 Even in the relatively well￾regulated US market, Aggarwal and Wu (2003) have documented hundreds of cases of price manipulation in the 1990s. Following Allen and Gale (1992), we classify manipulation into three categories: information-based manipulation, action-based manipulation, and trade-based manipulation. Information-based manipulation is taken by releasing false information or spreading misleading rumors. The operation of “trading pools” in the United States during the 1920s gives examples of information-based manipulation. A group of investors would combine to form a pool: first to buy a stock, then to spread favorable rumors about the firm, and finally to sell out at a profit.4 The striking cases of Enron and the Worldcom in 3 For example, China's worst stock-market crime in 2002 was a scheme by seven people, including two former China Venture Capital executives, accused of using $700 million and 1,500 brokerage accounts nationwide to manipulate the company share price. 4 An example of information-based manipulation is the case of Texas Gulf Sulphur Company in the 1960s (Jaffe 1974). In late 1963 drillings by its engineers struck huge mineral deposits. Between November 1963 and mid-April 1964, company officials tried hard to convince the public that the opposite was true, by falsifying evidence, while accumulating company shares and options. On April 12, 1964, the company even issued a press release stating that the technical