More Thoughts on Market Manipulation

There were two comments made in response to my earlier article entitled "Surely You're Joking, Sam!". I want to reply to them in a post.

Reader CoyPond raised many interesting points, which I have summarized below together with my reply (in italic).

Why is Harvest designated longer than the 6-week designation suffered by Iris in 2006? Is the designation a test of will?

Iris was designated from May 11, 2006 to June 21, 2006. Harvest has been designated since November 15. In my opinion, it is not appropriate to set a standard duration for stock designation. If you do that, the manipulator will game the system by factoring the designation period into their play. It would be a real mockery if the manipulator were to use the designation as a “pause” to shake out the weak players, namely the retail players, before another big push.

By injecting an element of uncertainty in designation period, the exchange is able to hold the manipulators by the throat. The syndicate or pool may not have unlimited resources to keep share price at a certain level. Even if they have the resources to do so, they would not want to fight a losing battle with the exchange. They will eventually sell off & exit the stock. Once the syndicate or pool has done that- which the exchange can verify- then the designation would be lifted. The exchange should only be concerned with the action or position of the syndicate or pool, not the unfortunate position of the minority shareholders or punters who are stuck in the stock.

Why is Bursa maintaining the designation after Harvest has announced its additional business as per the announcement in BURSA's website on 19 & 20 Dec 2011?

I believe the designation of Harvest was triggered by market manipulation. While Harvest may have secured more business during the interim period, this doesn’t change the fact that the exchange’s finding that there was market manipulation in the stock. If we were to lift the designation on account of such announcement, many cases of market manipulation would go unpunished by simply making announcement of new projects or business secured.

Bursa claimed that it does not want a disorderly market and yet the action of designation is causing a disorderly market.

Sometimes when the police tried to stop a bank robbery, innocent bystanders got injured or even killed in the crossfire. Does that mean that we shouldn’t stop bank robbery? In the case of Harvest, how innocent are the retail players caught holding the stock? The exchange had issued UMA queries twice and a Market Alert on this stock. The retail players continued to get into the stock, totally oblivious to the danger involved.

Why Bursa hit on Harvest and did not take any action against Envair (or an older case, Jetson)?

Each case is different. Like many, I am very disappointed with the case of Envair. There appears to be gross misrepresentation made by the Company & the key players. Is there market manipulation? As a layman, you and I may feel that there could have been market manipulation. But, did the exchange detect any market manipulation, where the parties involved had created a false appearance as to the price of; or the market for; and, active trading in, the stock? It is the artificiality of the trade that is prohibited.

If guidelines and procedures are not transparent, it will lead to abuse and corruption obviously.

I agree with you on this point. There are many cases where we feel strongly that there were or could have been market manipulation and yet, the exchange didn’t take action. If the decision taken is not transparent, then there is room for abuse.

However, we must balance the need for transparency and the danger of publishing too much details of how the manipulation was perpetrated. These trade secrets should not be treated like sex education leaflets or pornographic magazines. They are more like manuals on how to build a nuclear bomb. Unless, you are okay with a backyard industry manufacturing nuclear bombs, you would like to safeguard these dirty secrets from the general public. Even more inappropriate is the capability of the surveillance system that the exchange has at its disposal. Like the game of cloak & dagger (of the spy trade), such information must be guarded properly. Does that mean that the public has no way of knowing that the exchange is working proper? No, we can set up a permanent committee comprising prominent people from the industry and senior personnel form the exchange to review cases of market manipulation.

Finally, CheahSweeKuan raised the question of competency of the people in the exchange. I don’t think it is appropriate for me to question the competency or even integrity of the personnel in the exchange. I work on the assumption that they are competent and that they look after the interest of the investors and other participants in the industry.