Budi Frensidy: Beware Market Manipulation
Nino Eka Putra ~ Humas FEB UI
DEPOK – Professor of Finance and Capital Market FEB UI, Budi Frensidy released the article published in Kontan newspaper, Bursa-Wake Up Call Column, Page 4, on Monday (2/2/2020) that one of the ten CFA modules tested for level I through III with a weight of 10% -15% are Professional Ethics and Standards. There are seven professional standards that are binding and must be adopted by CFA members and candidates.
The seven standards include professionalism, capital market integrity, obligations to clients, obligations to employer companies, investment analysis & recommendations, conflicts of interest, and responsibilities as a member / candidate. The capital market integrity standard is further divided into two namely nonpublic material information and market manipulation.
The final standard is interesting to explore by the emergence of the Jiwasraya and Asabri cases and the decline in the NAV of dozens of our mutual funds. In the financial and investment literature, we are not familiar with the term fried stock that has been widely discussed lately but market manipulation jargon has long existed and dissects the same phenomenon as so-called high cholesterol stocks.
In its original version the CFA Institute stated, “Members and candidates must not engage in practices that distort price or artificially inflate trading volumes with the intent to mislead market participants.” the purpose of deceiving people or entities in the market.
Market manipulation is ubiquitous, although in developed countries it is less frequent than in developing countries. However, cross-border investments made by global investors face increased risk due to the rampant practice.
“Market manipulation weakens the functioning of financial markets and disrupts market efficiency. Market manipulation also results in a decline in investor confidence in the reasonableness of the prices that occur. The decline in trust has made investors reduce their participation in the stock exchange so that daily transactions are eroded. They also ask for a greater market risk premium. The low efficiency of the domestic capital market and rising risk premium ultimately negatively impacts the growth and health of a country’s economy,” he said.
Market manipulation includes the dissemination of false or false information and transactions that are deceptive or potentially misleading market participants who monitor price movements on the exchange. The mushrooming of new products, issuers, and technology increases incentives, ways and opportunities for manipulation. Likewise, the increasing complexity of the market and the sophistication of available IT, has created new tools for manipulation.
Information Manipulation
Information-based manipulation includes, but is not limited to, spreading false rumors to encourage others to make transactions. Big players in the markets of any country have long tried to broadcast false news about a company or even about the whole market to open their way to profit.
“In the United States (US), penny stock is often used for this purpose. Not unlike in the US, in our exchange they use small capitalized stocks as targets. Not infrequently they also use large mass media to neutralize the false news. Therefore, protect yourself from inconsequential news by always confirming news and sources before acting, “he said.
Derivation of fake news is a pump and dump game via email and massive social media. This is done by manipulators by sending a series of positive and optimistic statements about an issuer to attract buyers. This price pumping tactic takes its toll when investors flock to buy the shares in question which results in high prices and high volumes. When prices have risen by tens of percent or more, these pumpers also sell their shares (dumps), which makes prices jump.
The best way to fortify yourself from this tactic is to avoid buying shares that are skyrocketing. Nimble traders and investors who are able to identify this action will certainly benefit by buying when prices start to move up and out before prices reach their highest point. Remember, in the short term trading on the stock market is a zero-sum game. There are always a handful of parties who can profit from the losses of most other investors.
Transaction Manipulation
This manipulation includes actions and transactions to disrupt prices or volumes with the aim of giving signals of price and volume movements of a stock. Transaction manipulation can also be done by taking a dominant and controlling portion in an effect in order to exploit and manipulate the price of the security.
“For example, placing buy (sell) orders in large quantities without really intending to buy (sell). This large buy (sell) order will be canceled before the appearance of the seller (buyer). This tactic is called layering or spoofing the tape. In contrast to layering which is only bluffing, another tactic that is wash trading is done by big players by buying and selling the same shares continuously quickly in the hope of attracting the interest of naive investors who are fooled by the high trading volume, “he added.
Transactions with a market manipulation mode must of course be distinguished from strategies resulting from technical analysis or those based on perceptions of market inefficiency. “The initial intention to do a transaction is very important to determine whether a transaction can be called market manipulation or not,” he concluded. (Des)
Source: Kontan Newspaper. Edition: Monday, February 3, 2020. The Exchange-Wake Up Call column. Page 4