What does "Holding the Market" Mean?

Holding the market is a technique where people attempt to stop the downward slide of a security's price by putting in large buy orders to create a price floor and stop the loss of value. This practice is difficult, as functionally a great deal of money is needed to make a large enough order, and it is also illegal, except in very special circumstances. Most institutions and investors are unwilling to take a risk by holding the market.

The reason this practice is illegal is because it is a form of market manipulation. People are trying to control the price of a security by changing the factors around supply and demand. Market manipulation is considered an obstruction to fair and open dealing, and is banned in most nations. The cases where it is permitted are generally those when an underwriter is releasing a new issue and special permission is granted to start holding the market if the price becomes extremely volatile.

This practice can also put people at significant financial risk. Assuming the buy orders are filled, the person or institution holding the market now has a large number of shares in a security known to be volatile. There is a risk that despite the intervention, the price will continue to fall. This will result in a substantial financial loss unless the investor can hold on to the shares long enough for the price to trend back up, if it does. The longer the investor waits, the greater the risk, as there is a chance the low prices will keep slipping and never recover.

Regulatory agencies tend to keep a close eye on market activities to look for signs of illegal or questionable activity, as well as to identify firms in trouble. If there is a concern that someone is holding the market, an investigation will be conducted into the circumstances to determine if corrective or penal action needs to be taken. Given the size of the transaction involved, it is very difficult to hold the market accidentally, and regulators will view a very large buy order for a commodity with a slipping price with suspicion.

This term comes up in another financial context not related to market manipulation. People who own general stock market indexes may be said to be “holding the market.” They rely on the generally reliable performance of these indexes to contribute investment earnings. These products are created for investors, and holding the market in this sense is entirely legal.