Financial Times

Big stink in stock market
There is something mighty strange going on in the stock market. The sudden rise and fall in the prices of a number of stocks, for no apparent reason, has left many investors bewildered and prompted the regulators to probe these transactions.

What is happening is that some ill-informed retail investors are being taken for a ride. And the regulators seem to be rather cautious in taking action against those who are obviously manipulating the market,probably given the complexities involved.

These unusual movements in share prices, mainly of low-valued, illiquid stocks, first started happening a few months ago. The regulators have said they were concerned by these unusual and inexplicable share price movements and the Colombo Stock Exchange (CSE) has warned brokers against manipulating the market and of creating a false market by buying or selling shares at successively higher or lower prices. This was several weeks ago and it seems those behind these unusual share price movements are unconcerned because the practice continues unabated, and even appears to have increased, if last week's market activity is any indication.

Prices of certain shares have doubled or even trebled and those investors foolish enough to buy at such levels are left holding over-valued shares which they can dispose of only at a loss. The sellers make a killing.

The CSE has taken to regularly writing to the companies whose share prices have been fluctuating wildly, asking for explanations. And these companies have been diligently replying to the CSE. In almost all cases they have maintained that there is no reason for these unusual price movements and that there is no price-sensitive information to disclose.

What then could be the reason for such strange price movements? Harmless speculation is one explanation. But the more sinister one is that somebody, or a group of investors, is manipulating the market.

It is true that a lot of black money has entered the share market in recent times and that this is partly responsible for the bull run, as is the fact that the stock market is the only place to make short term high returns since money market instruments and bank deposits are giving negative returns.

Given the small, illiquid nature of the Colombo bourse, it is possible for a few well-heeled investors to manipulate share prices. This has been known all along as has been the fact that insider trading is not uncommon given the small, incestuous nature of Colombo's business world.

A recent report by Asia Research speaks of "widespread information leaks" that led investors to inflate the price of a certain share in anticipation of a bonus, so much so that one-day returns after the actual bonus announcement were in fact negative.

We have in the past commented upon the practice of the regulators compounding offences in the stock market, allowing white collar criminals to get off by merely paying a fine which, given the deep pockets these individuals invariably have, they are easily capable of doing. And, mind you, with no admission of guilt!

Such lenient treatment of market manipulators does not reflect well on the Colombo bourse, the broking community or investors. Sterner action is required and only more stringent punishment could serve as an effective deterrent. For, if an impression gains ground that the Colombo bourse can be manipulated with ease and that its transactions lack transparency, the gains of being one of the world's best performing stock markets could easily be eroded.

Of course, there is another side to the story and that is the stupidity and greed of investors. No amount of regulation could prevent investors burning their fingers because of greed or ignorance.

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