  This study investigates the prevention of market manipulation using a
price-impact model of financial market trading as a linear system. First, I
define a trading game between speculators such that they implement a
manipulation trading strategy that exploits momentum traders. Second, I
identify market intervention by a controller (e.g., a central bank) with a
control of the system. The main result shows that there is a control strategy
that prevents market manipulation as a subgame perfect equilibrium outcome of
the trading game. On the equilibrium path, no intervention is realized. This
study also characterizes the set of manipulation-proof linear pricing rules of
the system. The set is very restrictive if there is no control, while the
presence of control drastically expands the set.
