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The real loser is the retail investor

Insider trading, rigging and manipulation

Rather than prolong the debate with Noble Group about why there was no profit warning (tempting though it might be since it'd be like shooting fish in a barrel), I thought a discussion into rigging and manipulation might be interesting because of this email I received from a reader last week, someone with plenty of experience in local stocks -

"I am wary, and many others probably are too, of the apparent high level of manipulation going on in the market here.  Looks like it's pervasive and endemic.  Many a time, trading on insider info seems to have gone on unnoticed...(here there is mention of odd movements just before certain large deals were announced).  At the end of the day, it's unknowing and unsuspecting retail investors who bear the brunt of it all.  The problem, as I see it, is too much emphasis and too much media attention are being given to the incessant preaching of transparency and governance and too little space is being devoted to the apparent manipulation that goes one in the market day in, day out (other than your BT articles, of course).  I have expressed my thoughts to friends that the more we emphasise transparency and governance, the bigger the facade we build for the hordes of crooks and cheats out there to hide behind, and the greater we create a sense of false sense of insecurity for innocent retailers''.

"Caveat emptor is no defence for what's going on.  People can only make decisions and judgment calls based on the information available in the public domain.  We are really battling the modern communication science of creative packaging - selling what we want to sell and hiding what we don't want to show.  The irony is in a dark room, only the blind can see; the greater irony is we are all not blind.  But how do we change the situation?''.

How indeed. I agree with the writer that there is widespread jiggery-pokery that goes on every day - the stock market after all, is a cesspool of greed and crookedness, and with the stakes as high as they are and with millions to be made, it's a sure bet that those who can gain an unfair advantage and get away with it, will do so. So if anything is to be done, the starting position has to be acknowledgement that there is a problem, perhaps not as huge as might have been thought, but a problem nonetheless.

But the interesting argument presented above is that as long as we keep saying ours is a transparent and well-governed market, we'd be doing retail investors a disservice since they might be lulled into a false sense of security. And if they are, they become easy fodder for the crooks who, after all, require a ready pool of "greater fools'' in order to exit and make the their money. So instead of constantly patting ourselves on the back, it would be much more preferable if regulators actually did something about it. 

I think the reader has a point. For example, the investigation into the collapse of the infamous three penny stocks has now stretched into its 17th month and the market is still no wiser as to what actually happened. How did stocks rise more than 100 times in a couple of years, then crash back to below their starting levels in a few days? Shouldn't investors have a right to the answers within a reasonable time frame? And what of the sudden, late movements in the Straits Times Index at the end of significant reporting periods? If the index gets ramped up say on the last day of a quarter only to plunge back the next day, isn't there an element of a "false market''  present that should be investigated? And what about the large gains before companies announce takeovers?

For better or worse, ours is a "caveat emptor'' market, which means everyone should be aware that risk plays a big part in daily affairs. However, for it to work as intended, there has to be prompt and decisive action when something goes amiss. Come down hard enough and often enough and insiders and the syndicates will be a lot more wary of indulging in their illegal activities to make money. So far though, this has not been the case. As the reader suggested, the real loser is the retail investor.