Are Synthetic indices manipulated?

The question of potential manipulation in the synthetic indices market often arises due to their relative novelty and specific nature. Indeed, since these indices are not tied to real assets and are algorithmically generated, traders are concerned about the transparency and fairness of price formation, especially since Forex or stock markets are more protected.

Thus, practically, manipulating synthetic indices is possible, but the degree and likelihood of risk often depend on the broker and regulation.

Let’s look at some common scenarios:

A broker controlling the index could theoretically change the algorithm to create artificial price movements that benefit them, rather than the trader.

For example, the broker accelerates volatility (sharp price jump) when many traders have placed stop-losses (protective orders that automatically close a trade at a specific loss level). As a result, these stop-losses will trigger – traders lose money, and the broker profits.

Brokers that offer synthetic indices may intentionally delay order execution to profit from price changes. This is particularly critical for scalpers, who profit from small price fluctuations, where every second is crucial, as it can turn potential profit into real loss.

Spread is the difference between the price at which an asset is bought and sold. It’s somewhat like a broker’s commission.

Suppose a trader wants to buy an asset, but at the last moment, the commission suddenly increases several times. This happens when the broker widens the spread during periods of high volatility. As a result, trading becomes unprofitable for the trader.

Of all the practices mentioned, this one is the most controversial. It’s hard to catch, but many traders believe in it, suspecting brokers of deliberately “hunting” for stop-losses. The goal is simple – to shake traders out of their positions and take their money.

In practice, this works in a straightforward way. A broker with synthetic indices sees where most traders have placed their stop-losses and slightly “nudges” the price. Once the stop-losses are hit, the price returns to its previous level.