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Market operators - good or bad for the market?

Tuesday, April 28, 2015 - 11:11

Every so often we see cases of stocks being cornered and rigged. These come to light when the authorities swoop suddenly with an investigation,  catching everyone by surprise, resulting in massive losses in the stocks concerned. Those with memories that stretch back more than a decade will recognise infamous names like Links Islands, Mid-Continent, Jade Tech and Leong Hin, all stocks with "manufactured'' stock price charts, ie the price gains were not due to natural forces of supply and demand but instead were the product of artificial intervention. Or if you prefer, in all those cases, "a false market'' existed for those stocks, ie a market where certain parties, known in market jargon as "operators'', control supply and therefore can influence demand and prices.

I'm pretty sure that if you look hard enough today, you'd be able to find many more instances of price charts that are manufactured in such a fashion but it's interesting to ponder the phenomenon of the "operator''. If you're familiar with Hokkien words, these players are sometimes referred to as "chng-kays'' which is a word that means "house dealers'' at casinos and is employed in this instance because the "chng-kay'' holds all the cards and has the odds stacked in their favour. So it is that sometimes, stock market investing becomes simply a matter of finding out if there is a chng-kay behind a particular stock, checking what their track record might be, then simply buying on blind faith that as long as you sell before the main operator bails out, you'll be OK.

The operator phenomenon is not new and has probably existed since the birth of financial markets, early in the last century. That it exists shouldn't be surprising because the financial stakes are very high - anyone who can control all the variables which influence their stock price and thus ensure only gains and no losses would surely be tempted. During the heyday of Clob Internationa in the mid-1990s, we saw plenty of such examples - back then, the operators were known as "syndicates'', well-heeled brokers and businessmen who ploughed in their wealth to corner stocks, ramp them up by as much as 50 times before unloading everything on the public. (The best example I can recall is stock that rose from ten sen to M$150 then crashed back to ten sen before the company was delisted).

In some cases, chng-kays are used to maintain stocks at particular levels and to ensure liquidity. This occurs when shares have been pledged to banks as collateral for loans, in which case a bank requirement would be that not only must prices remain close to the pledged level but also that there is active trading in case the bank needs to force-sell. In such instances, traders in the same operating team would then buy and sell among each other so even though it looks like the stock is actively traded,  there really is no beneficial change in ownership.

Is any of the above new to readers? I'm pretty sure the answer is no. Investors might not have heard of operators or chng-kays or syndicates or whatever description might be appropriate when they start off in the market but it's a safe bet that in a short space of time, they would become familiar with the phenomenon. The really interesting question to ask is this: are operators good or bad for the market?