Traders create false demand to influence market behaviour
17 February 2015
Plus News Pakistan
KARACHI: One reason most ordinary folk tend to stay away from stock investing is their belief that the share market is deeply manipulated.Their opinion is not without a basis. Using trade-level data from the Karachi Stock Exchange (KSE), American economists Atif Mian and Asim Ijaz Khwaja carried out a detailed study in 2004 that found ‘compelling evidence’ for a pump-and-dump price manipulation scheme.
When prices in certain stocks are low, big brokers trade amongst themselves to artiﬁcially raise them and attract naive positive-feedback traders. Once share prices go up, the former exit, leaving the latter to suﬀer the ensuing price fall, the study concluded.
Such conventional tricks to manipulate the market create an actual demand – albeit on a false pretext – for certain stocks. But in recent days, another market manipulation tactic has come to the fore that generates a ‘false demand’ in a select group of stocks.
A false demand for shares is one where so-called traders place large sums of orders without any intention to actually purchase the same. This is done by placing a huge order and deleting it within a few seconds from the electronic trading system.
The lack of intention to execute a fair transaction creates a misleading appearance of active trading in a share, which may otherwise be dormant.
The Securities and Exchange Commission of Pakistan (SECP) recently issued a prohibitory order against a Karachi-based brokerage and directed it to stop such trading practices that some of its clients have been indulging in.
The SECP examined KSE data that proves certain individual clients of Creative Capital Securities actively placed orders in various stocks during the first 22 days of December 2014. “(A) review of the order-level and trade-level data indicates that (the) quantum of trades executed by such clients was very few in proportion to the orders placed by them,” SECP Director Abid Hussain wrote in his order on February 9.
As an example, he referred to the four clients who placed a ‘significant’ quantum of buy/sell orders in many stocks over the 22-day period. However, they deleted ‘a large proportion’ of orders out of the total orders they had placed within five seconds.
A client named Muhammad Naveed placed as many as 3,276 orders in the 22-day period, order-level data showed. But he ended up cancelling 1,413 orders, or 43% of the total orders he had originally placed, over the same period.
The number of orders that he cancelled within five seconds was 327, the order-level data showed. Three other clients of the same brokerage house cancelled 44%, 45% and 47% of the total orders they had placed individually during the same period.
Saying that the brokerage house is responsible for every order placed or trade executed through its trading terminal, the SECP director said Creative Capital Securities should monitor all trading activities and prevent the creation of a false appearance of active trading in any security. In case Creative Capital Securities does not comply with the relevant regulations, the SECP said it will be “constrained to initiate necessary legal proceedings against the brokerage house”.
Speaking to Plus News, Creative Capital Securities Director Hanif Ashraf categorically denied that his clients had any mala fide intention.
“These four clients are very active day-traders and usually transact large volumes of business on small spreads,” Ashraf said, adding that he has orally discussed the SECP’s observations with his clients, who maintain that they had no intention of manipulating the market.
Insisting that their orders do not influence the market behaviour, Ashraf said his clients normally adopt this pattern of trade to get ‘best prices’ out of their purchases and sales.
“A mechanism must be devised in the Karachi Automated Trading System to eliminate this type of trading pattern if the regulator thinks it hurts the interests of the general public,” he said.