Market Manipulation

Recently some stocks at the NSE have confounded many by their metoric rise in prices backed by no fundamentals whatsoever. Some have used this appreciatiation to justify splits and bonus issues. We may not rule out manipulations as the following story from the Dec 19, 2006 edition of The East African/All Africa Global Media via COMTEX attests.
"For a number of years now, there have been murmurs that NSE is being manipulated by operators who have learnt the art of orchestrating artificial surges of demand for the shares of specific companies, enabling cliques of sellers to profit. In the process, unsophisticated buyers will respond to the rapid increases in the prices of these stocks by putting in orders. This explains the riddle of companies whose share prices have risen even when there were no fundamental changes in the fortunes of the company.
Market manipulation is not unique to an emerging market like the NSE. The phenomenon occurs even in sophisticated markets such as the London Stock Exchange and New York Stock Exchange.
THEORETICALLY, STOCK-markets are considered to be efficient because every investor in the market has access to all available information. According to theory, the price of the stock therefore reflects all available information on the company.
This is why, in more mature markets, there are more stringent reporting and disclosure requirements compared with emerging markets like the NSE, which are therefore more vulnerable to market manipulation.
Market manipulators are invariably people with access to privileged information such as corporate insiders, brokers, underwriters, large shareholders and market makers.
Once the manipulator has obtained inside information, he will then start buying the stock, creating liquidity and volatility. This will attract technical analysts who will call the market by volume and price changes.
The manipulator will then accumulate all the liquid shares available on the market with the intention of driving the price up, during which time he will release bits and pieces of information such as news of a big contract or increased earnings etc.
The information-seeking type of investor will thus be attracted, thereby creating a new level of demand for the shares.
COMING TO THE PHENO-menal interest in the recent IPOs on the NSE, it appears the investing public have noticed that new IPOs seem to come to trade at a significantly higher price.
This perception creates an artificial demand at the IPO stage and when the stock comes to trade, demand that ignores fundamentals such as future potential earnings. In an efficient market, the stock price must reflect its real or intrinsic value.
Trading on full and plain disclosure of information improves market efficiency and lack of information reduces market efficiency, thus increasing market manipulation. The irony in our situation is that informed traders and market manipulators compete for shares, thereby increasing the manipulators' profit.
Price manipulation at the NSE is one of the factors that has continued to curtail the effectiveness of arbitrage activities, especially in the case of cross-border trading between exchanges in Uganda and Tanzania. Arbitrage activities have in fact been rendered completely counterproductive.
In these situations, the need for regulation is acute. In particular, enforcement of anti-manipulation rules can improve market efficiency.
I WILL NOT NAME ANY OF the stocks listed on the NSE. But any discerning observer will have noticed what has been going on with specific stocks.
Then, once the manipulator has insider information, he assesses the intrinsic value of the stock. If it is low, he drives the stock price up by accumulating everything av-ailable on the market.
Generally, to maintain the volume and price, the manipulator trades between fictitious accounts. And as soon as he realises that the informed trader is beginning to buy the stock, the manipulator starts selling out rapidly.
HOW CAN YOU DETECT that a stock is being manipulated?
To be successful in stock manipulation, the manipulator must pose as a credible informed trader. It has been observed that 40 per cent of such cases involve corporate insiders, 60 per cent involve brokers, 30 per cent involve large shareholders and 20 per cent involve market makers and stock underwriters.
Indeed, most successful manipulation schemes are undertaken jointly by several parties. In most cases, they will trade among accounts owned by essentially the same individual or group.
In the case of the Nairobi Stock Exchange itself, two important regulations must be adopted to discourage market manipulation.
First, there must be properly detailed disclosure requirements for all listed companies covering any material changes that may affect the stock price. The news must be announced in a timely fashion and must be easily accessible to the investing public.
Second, there need to be disclosure requirements for major shareholders, officers and directors of the company in the event they change their stock position.
Third, every trade must indicate which brokerage house is buying and selling.
Copyright The East African. Distributed by AllAfrica Global Media (allAfrica.com)."

So let us be careful before we jumping the bandwagon to the merriment of these manipulators.