Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Scalpers

What it is:

The term scalpers refers to securities traders who manipulate the market.  Scalpers may also refer to traders who earn relatively small amounts of money from the arbitrage between bid prices and ask prices on securities.

How it works (Example):

In the case of market manipulation, scalpers may buy a security, then recommend the security to investors and take a profit on the difference between their price and the sales price once the market demand raises the price.

Scalpers may also act as market makers, making a spread between the bid price and the ask price of a security.  The role of market makers is to provide liquidity in the trading of securities, taking bids and settling on prices.  The profits are realized from the difference between the ask price and the bid price on a security.  The arbitrage gain on these spreads is usually small and short-term.

Why it Matters:

Scalping to profit from the increase in the price of a security as a result of manipulating the market is a fraud under the Investment Advisors Act of 1940.  The prohibition applies to registered and unregistered investment advisors.

The scalper's business actually overlaps and competes with the designated market maker.   However, because the market maker is usually designated by the exchange and has specific, proprietary information about the security, and has substantial capital resources, the general scalper is at a disadvantage.

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