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Lies, damned lies and market manipulation

The Bombay Stock Exchange (BSE) sensitive index seems to have choked on some pre-election jitters as it raced towards the 5000 mark. Though the mood is still distinctly bullish, the 250-point plus correction sends the message that investors are not too confident about this bull run; they are all set to square up their positions and run at the first sign of trouble.

Caution is really the key to investment in this market. The savvy investor is one who does not believe every rumor on the street and learns to read between the lines of newspaper reports. Once you get the hang of it, the slants and the plants fairly leap out of the news columns.Here are a few tips on how the system works.

A couple of weeks ago, a leading business daily argued that Indian investors tend to scream `insider trading!' at every steep increase in stock prices. The writer says that we, as a people, are so against big profits and high returns that we turn suspicious at every serious rally and demand inspection and disciplinary action by the market regulator. Really?

How is it then that, apart from 30-odd blue chip stocks that have powered their way to new highs on the basis of sheer performance and prospects, the market credits one or the other major broker with the steep rise in every other scrip which forms part of this rally? A broker who discovers an undervalued stock does not advertise it until he has bought a large enough quantity without letting the price go up. When the brokers' connection with a stock becomes public knowledge, it is usually a sure sign of manipulation and that the broker is seeking to drive up the price. Let us look at how key players operate.

The Big Operator:

Ask any punter on the market and you will be told the name of one or more brokers who `control' or `manage' the prices of 100-odd scrips which are the big gainers in this Bull Run. They will also tell you the level to which each scrip is planned to be ``pulled up'', but it certainly does not stop them trading in the scrip.

The skill is to make money by watching the Big Operators' actions and book your own profits before he exits the stock. When the going is good, and the broker is able to place the stock at regular intervals with large institutions and funds, he revises his upper limit and keeps the game going. The punter then stands to make a lot of money by hanging on and the Bull Run continues. Those who traded during 1991-92 will remember how this method was used to push up the price of ACC from a low of Rs 300 to an incredible Rs 10,000 just before the securities scam pricked the bubble.

The Management-Broker Nexus:

The bigger operators naturally play for bigger stakes. Very often they operate hand-in-glove with the company management to share the profits from the price rigging. There are at least 30 companies that are being actively manipulated in this manner. It usually starts with a reasonably good story to push the stock and is not necessarily a short term operation--it often goes on for almost a year, or until the market takes a decisive turn.

This operation fools small investors the most. Its well-oiled network includes friendly journalists who publish positive reports and well-timed announcements of plans to engineer strategic rallies and to keep the company in always the news. The operators often work in tandem with Foreign Institutional Investors (FIIs) and Mutual Fund managers who buy the stock at various points to lend credibility to the price rigging.

If the shares do not find easy buyers among financial institutions, it often needs to be fuelled by forward trading either in the official market or through illegal badla trading which is rampant on certain exchanges. This would explain the controversy over pushing certain scrips into the specified list of the BSE. Though the list was later revised, it provides a good check point for those keen on learning about media manipulation.Do go back to the newspapers and find out who supported the action, and also those who have maintained an eloquent silence on the issue.

Wise Guys On The Street:

These are important players in the game.They are the chaps who know and write about every major deal on the market: the exact number of shares traded and a psychographic analysis of why a certain fund bought a particular stock. The problem with these columns is not necessarily their accuracy--at least not in the top-of-the line publications. The danger is that they often present half a picture.

For instance, there are several FIIs today who agree to lend credibility to a market operation by entering and exiting a stock with a clean profit to themselves. One could call it a ready forward transaction, where the operator buys the stock either directly or through friends. Usually the market columns hype up the first half of the deal when the FII purchases the scrip, but fail to report the sale (or buy back). This creates the myth that FIIs and Mutual Funds also find the stock attractive and lure other institutions and retail investors.

FIIs and Foreign Brokers:

These are the demi-gods of the market. There is a myth that because FIIs and foreign brokers are part of sophisticated foreign system, subject to stringent compliance procedures and regulation by a feared market watchdog, the Securities and Exchange Commission, they will do no wrong. If you are inclined to believe that, then look at the fines paid by the biggest names on Wall Street with amazing regularity for malpractices caught by the SEC. If anything, they are probably more skilled at outwitting the regulator and more clearly focussed on their business interests.

I know at least two analysts who have switched several jobs because the big foreign investment banks which employed them would not let them tell the truth in their research reports. Do not be fooled by talk about Chinese walls. Bad news is always played down because every company is a potential future client for the investment bank.

FIIs want to be in the good books of companies and privy to inside information rather than to criticise them. This practice is even more rampant in the US. Michael Lewis, the author of Liars, Poker and The Money Culture, recently wrote in Bloomberg News about how the analysts of big securities firms almost always underestimate the earnings of companies or ``poor-mouth'' them so that the markets are ``pleasantly surprised'' when the results ``exceed expectations''.

He says, ``Of course, the behaviour of the Wall Streets analysts is corrupt. The companies they are meant to be analysing are usually either customers or potential customers of their investment banking divisions''. In order to keep their big clients happy they essentially lie to the greater investing public. Lewis says that at the same time they also keep their large institutional clients happy by giving them estimates that are more honest on the sly.

These and other sophisticated ways of manipulating prices and clients are finding their way here. Since the fund managers are usually dollar earning, sophisticated, smooth talking graduates from Ivy League universities with close connections to the power structure it is all the more difficult to even investigate them in India.

The message for the smart investor is to watch out. Do not get carried away with news reports and turn smart by pooling information with like-minded investors.

(Sucheta Dalal is one the most respected financial journalists in India)

Sucheta Dalal

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