Sucheta Dalal :ManipulatorsR17; paradise
Sucheta Dalal

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Manipulators’ paradise  

Sep 11, 2005

Now that the Sensex had crossed 8,000, the perennially optimistic are eyeing 10,000. But if the Sensex were to comprise of 300 penny stocks instead of 30 blue chips, it would probably have soared well beyond the 16,000 that was recently predicted by a regulator. So brazen and rampant is the manipulation in penny stocks that Chairman M. Damodaran of the Securities and Exchange Board of India (Sebi) has threatened action in this segment. Unfortunately, the biggest chunk of retail investors (in terms of numbers) are mainly active in penny stock trading where a 20 paise stock promises a five-fold return by jumping to Re 1 and the potential losses are inconsequential compared to the profit opportunity. Most investors rely on a SMS-based tipping service, whose predictions have so far surpassed targets. Penny speculators range from college students to traders and all those who have a penchant for betting on cricket matches and horses. As for their trading strategy, it is best described in the words of the legendary speculator Jesse Livermore: “The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.’’ Livermore said this during the powerful bull market that ended in the original Manic Monday of 1929. Like his trading strategies, Livermore’s analysis of ordinary investors’ greed is still relevant.


Circular trading


It is now a clear pattern that the first sign of price manipulation in a stock is when its trading volume shoots up without reason. A group of Delhi-based investors have written several letters to the Sebi chairman pointing to four specific stocks that are being manipulated by generating huge volumes. This is done by simultaneously buying and selling large quantities of shares from different terminals to create the impression of huge investor interest and enormous liquidity. Market sources say that manipulators usually ensure that the terminals are often located at different cities to create the impression of wide-spread investor interest. Market operators have got together with some smart programmers to write codes for generating trading patterns and loading them on to trading terminals without the physical bother of keying in millions of numbers. Among the stocks that have run up in this manner over the last few weeks are companies associated with bio-fuels, media, entertainment, security and trading companies.


Raging bullishness


A raging bull market ignores bad news and the bear market discounts good news. Even a cursory look at stock movements shows how true this is. For instance, even the arrest of its chief didn’t exactly send the hyped-up Provogue share on a downslide, yet the stock sprang up on news that the court had slammed the police case and let him off. Similarly bank stocks along with information technology and oil stocks accounted for half the increase in the Sensex over the last 1,000 points.


This bullishness is clearly limited to half-a-dozen private banks. The nation-wide strike threatened by bank unions and their list of demands, shows that the situation is turning bleaker. The unions oppose dilution of government holding even to 51 per cent. This suggests that banks cannot even fund expansion and growth through dilution. They also oppose bank consolidation through mergers and no increase in the Foreign Direct Investment limit to 74 per cent in Indian private banks. About the only positive demand by unions is that wilful default must be termed as a criminal offence.


This is ominous, because the unions are backed by the Communist parties. But unlike May 17, 2004, the announcement barely created a ripple in bank stock prices. It’s a bull market, stupid.


Bull market genius


There is already a website called, which says: “The Indian stock markets have entered into a dynamic long-term Bull Market. We are currently in the early stages of the first phase of this fantastic Bull Market that will take the BSE sensitive index to beyond 10,000 points.


The gains for investors in the coming months will be spectacular’’. The problem is that it said this in September 1999, after the Sensex had journeyed from 2,740 points in November 1998 to a little under 5,000 points in August 1999. In September 2005, BSE10000 again looks current and clairvoyant — but its followers in 1999-2000 had probably lost their shirts in the crash that followed Ketan Parekh’s manipulations. Interestingly, it has a prescient axiom at the top of its page of quotes: “Don’t confuse brains with the bull market”.


Silence zone


Mumbai’s favourite God received an equally warm but less boisterous welcome this year due to the timely intervention of the Supreme Court, which refused to relax the 10 pm deadline for loudspeakers. While the Court has capped the decibel levels at 60dB, what is rather strange is the reluctance of most organisers to experiment with environmentally friendly sound distribution technology, says Vickram Crishna of New Radiophony.


-- Sucheta Dalal