Manipulation in Illiquid Markets – A Tale of Inefficiency?

There is a general consensus in the legal literature that illiquid markets are prone to manipulation. However, the question is not as simple as it appears to be. A plethora of provisions reveals that the European legislator is sceptical regarding the reliability of the price-formation mechanism in illiquid markets. Illiquidity constitutes a structural problem of the market, and illiquid markets are generally considered inefficient markets. The aim of this article is to analyse the relation between market illiquidity and market manipulation in terms of legality. We claim that the nature of the market affects the application of market-manipulation provisions and market-manipulation indicators. Issues such as causation, mental elements and standard of proof are strongly affected by illiquidity. The basis for this argument is that investors should not be condemned for a natural market phenomenon.