An Analysis On Constructive Elements Of Scalping Manipulation

Scalping is a common illegal activity inside securities market which usually consists of purchasing a stock in advance of making a buy recommendation, with the knowledge that a buy recommendation will help drive up the price of the stock and selling the stock at a profit once the scalper's recommendation has been issued and the price has risen in reaction thereto. China Securities Regulatory Commission (CSRC) has clarified that scalping is a form of market manipulation and imposed administrative sanctions on scalpers, but there are lots of controversial issues during regulation. These issues are of two levels:first, is scalping a form of market manipulation? Second, in the light of market manipulation, there are some controversial issues on the special elements of scalping manipulation which include elements of market effect, market position the scalpers hold and mental state. Study on these controversial issues is vital to the regulation of scalping in China.This article analyzes the legislation and regulation of the United States and EU (especially Germany), and discusses their positions on clarification of scalping and disputed elements in order to find answers to the referred issues of two levels.The problem of the first level is whether scalping constitutes market manipulation. With analysis of the legislation history, statute law and case law of the United States and the statute law of EU (especially Germany), Chapterâ…¡of this article addresses that market manipulation means creating artificial market prices or inducing the purchase or the sale of securities by others and scalping is consistent with the concept of market manipulation. Besides, the legislation and regulation of EU and Germany have both treated scalping as a form of market manipulation which supports the opinion practically. As to the second problem of the first level, Chapterâ…¡ addresses that scalping is information-based manipulation so that the activity which effects securities market is not the transaction, but the recommendation.Chapter III discusses the element of market effect and market position which scalpers'hold because of the close connection of these two elements. As to the former element, neither the legislation nor regulation of the United States and Germany regards it as an essential element of manipulation. The element which should be proved is the possibility of manipulation, in other words, the special position the scalpers hold. Although the latter element is not clearly addressed by the United States and Germany, the recommendations of defendants of all scalping cases all have strong possibility of effecting market owing to the special identity of defendants or the access of addressing recommendation.Chapter IV discusses the last issue of the second level, which is whether the mental state element is essential to constitute scalping manipulation and which level of scienter should be proved. In the United States and Germany, the element of mental state is essential, but the level of scienter is different between the two countries. In the United States, manipulation requires certain level of scienter, which is manipulative intent. In Germany, however, the mental element turned from purpose to simple scienter and recklessness can also constitute manipulation.The last chapter analyses Chinese legislation and regulation on these issues and provide suggestions for legislation improvement. First, regulations or rules should be promulgated to make it clear that scalping is a form of market manipulation. Second, as to the specific constructive elements, the market effect is not essential. Instead of broad definition, the market position of recommenders should specially defined but not be restricted to specific identities. Instead of the profiting purpose, recklessness can also constitute scalping manipulation.