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This is a very dumb question that I ask, but I think it's an important one. What kind of rules exist to prevent market manipulation? For example, suppose if the current stock price is 50 dollars per share, and the current bid-ask spread is 49-51. Lets say I go in and put in a bid of 1000 dollars for a share. If I find a seller, which I obviously will, would the stock price go up to 1000$ within that instant ?

If that's true, that means there must be constraints on how far away you can bid from the current market price. What are other such rules?

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Whether this is market manipulation is a legal question but you’re not going to achieve price manipulation in this way.

If you were to put in a limit order to buy 1 share for a \$1000 this order would be matched against the existing order at \$51 and be matched at that price so the last traded price will become \$51 not a \$1000. On the other hand, if there are only 10 shares available below \$1000 in the whole book and you put in a buy order for 20 shares you will buy those 10 shares for the limit price of those orders and the new market will become 1000 - $x$ where $x$ is the new lowest ask and the \$1000 represents a bid for the 10 remaining shares of your order.

In most markets liquidity is deep and can easily absorb the orders of one buyer. So it will be more like the first example than the second and your individual bid order will have negligible price impact.

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Next to the order matching mentioned in the answer by Bob, which explains why trading at an off-market price wouldn't necessarily happen if you put in an order at an off-market price, exchanges have rules in place that (explicitly or implicitly) influence price formation. These are typically intended to make sure that markets are 'fair and orderly', i.e. to prevent manipulation. Some examples that come to mind here are (these do not necessarily apply to all exchanges):

  • circuit breakers: these are limits where if prices evolve by more than X% over the course of a day, trading is temporarily halted;
  • There are requirements for market makers on things like that they must make two-sided markets within a certain maximal bid-offer. This of course doesn't prevent them from quickly changing both as prices rise or fall (and in fact to many algo's doing that can perpetuate something that's known as a 'flash crash')
  • It can be illegal to post large limit orders in the book with the intention of cancelling them later to influence price formation
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