Tricky business: Manipulators spread rumours to raise stock prices

Make quick and huge profits; unsuspecting investors fall into the trap

KARACHI:

Rumours may not drive the Karachi stock market, but they certainly help some people make a quick buck.

Speculators usually pick a third-tier stock that sells cheap. Then they buy and sell it among themselves in unusually high volumes while its price registers a significant increase over a few days.

It is followed by a rumour about the company that cannot be immediately verified, such as investment in a new plant or expansion into another line of business. Unsuspecting retail investors fall into the trap because it is a cheap, third-tier stock and exists largely off the radar screen of the research teams working for prominent brokerage houses.

After all, even a one-rupee increase in the price of a share that was previously trading at Rs10 means a hefty 10% return in almost no time. The trading volumes keep rising and the share price keeps surging - until the manipulators offload their large holdings, making a huge profit for themselves.

Such incidents have become more recurrent in recent weeks, with manipulators raising the price of a “sideboard stock” artificially by spreading a rumour and dumping the share afterwards.

Case studies

The most recent example is of Reliance Insurance, which is a general insurance company with a market share of 1.5% in the total premiums written during the quarter ended March 31.

Its share price stood at Rs16.75 at the end of trading session on July 31 after increasing by 56.5% in the preceding two months. Meanwhile, the volumes traded also saw a spike in June and July. While the total turnover in Reliance Insurance was only 389,500 shares in May, it increased over 70% in the subsequent month to 667,000 shares and finally reached 11.9 million shares in July.

The unusual activity in the Reliance Insurance stock alerted the Securities and Exchange Commission of Pakistan (SECP), which asked the company to clarify if there was actually any material basis for it.

Under the Securities Act 2015, a company must respond to the apex regulator’s directive to disclose to the public any reasons for the unusual movement in the price/volume of its traded security.

In a public notice on Monday, Reliance Insurance said no “material changes” occurred during the two-month period and that the company was “unable to comment as to why the trading volumes have triggered at such a high level and the significant changes in the price levels”.

Rumour on McLeod Road was that Reliance Insurance had secured a contract for a government-sponsored insurance scheme. However, the company stated it is “not aware of any speculation/rumour” in this regard.

Another stock whose share price and volumes have seen sharp movements over the last few weeks is Ghani Automobile Industries. From Rs8.9 per share on July 1, its share price rose 98.6% to Rs17.68 on July 23. The daily turnover also ranged from a minimum of 228,500 shares to a maximum of 23.7 million over the same period.

Word had it that Ghani Automobile Industries was about to receive a licence for the production of tractors. Although the company clarified that such reports were ‘misleading’ and ‘baseless’, the share price had already doubled in about two weeks by the time a formal announcement was made on July 24.

Similarly, the share price and trading volumes of TRG Pakistan have also been volatile in the recent months. Investors’ interest in TRG Pakistan spiked when a rumour about its upcoming takeover by a foreign company at a “substantial premium” hit the stock market in June.

When the SECP asked the company to clarify the situation, TRG Pakistan stated that it was “not aware of this rumour” and distanced itself from the sudden increase in the price of its share and trading volumes in the stock market.

Javedan Corporation and Merit Packaging have also seen similar sudden changes in their share prices and trading volumes.

“Investors should confirm the news in circulation on social media either independently or through the website of the exchange as well as concerned companies to ensure that material information was shared by the concerned listed company,” said Karachi Stock Exchange Chief Compliance Officer Abbas Mirza in a public notice last week.

Published in The Express Tribune, August 4^th, 2015.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.