In Pakistan you storm the stock exchange, smash windows and wreck the furniture.
The story is actually a bit more complicated than that. Stock prices have been on a continuous slide in the Karachi stock exchange, and are down 38 percent from April. The angry investors apparently wanted a halt in trading, which the exchange officials denied.
Pakistani investors have good reasons to feel that the markets are manipulated. My colleague Asim Khwaja and his co-author Atif Mian came up with a remarkable result when they analyzed finely disaggregated trading data from the Karachi Stock Exchange. They found that when brokers trade on their own account they make net returns that are 50-90 percent higher than those reaped by outside investors.
Neither market timing nor liquidity provision by brokers can explain this profitability differential. Instead we find compelling evidence for a specific trade-based ‘‘pump and dump’’ price manipulation scheme: When prices are low, colluding brokers trade amongst themselves to artificially raise prices and attract positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the ensuing price fall. Conservative estimates suggest these manipulation rents can account for almost a half of total broker earnings.
In other words, a casino where the house holds all the good cards.
Until recently, I would have assumed that this kind of manipulation occurs only in the under-developed, poorly governed financial markets of poor nations. But after everything that we have been learning in the wake of the sup-prime crisis, I wonder...
Stop wondering, boys on the street are taking a rip like everyone else. Cayne lost a billion, rightfully so. Typical MD has 75-85% of his net worth in company stock, excluding his home. They were not selling at the top, they are bloodied.
Posted by: dave | July 18, 2008 at 07:59 AM
A (Pakistani) commentator on the BBC mentioned that the reason for having a stock exchange - allowing firms to raise capital - was not be fulfilled in this case.
There have been no IPO's in the recent past, just speculation.
I wonder about the entire stock model, many successful firms do all their financing through borrowing and retained earnings. Why issue stock at all and dilute control?
The only reasons I can see is that the founders want to cash out and that the firm isn't of high enough quality to be able to obtain additional debt financing.
If banks won't lend you money why is the public willing to buy shares?
You can't cheat an honest man.
Posted by: robertdfeinman | July 18, 2008 at 09:51 AM
Dani.
Interesting you mentioned it. I have always wondered about the incentives given by stock options as reward to company officers. It gives them a strong incentive to inflate the value of the firm prior to their stock releases, and then come up with bad news in the aftermath to readjust the value of the firm.
Posted by: Tord Steiro | July 18, 2008 at 03:07 PM
Is it the same for Chinese stock market? It has been down for more than 50% since last year...
Posted by: Yang | July 18, 2008 at 07:40 PM
" . . analyzed finely disaggregated trading data from the Karachi Stock Exchange."
can you do this for the nyse? wouldn't surprise me if you came up with the same result
Posted by: bob2 | July 18, 2008 at 09:48 PM
i wonder why this comes as a surprise? maybe for the international community, but surely not for any local. its a long known fact, that the KSE is dominated my a handful few! and players have been living by-it in good times, soo why not live by-it in bad times!
but more importantly, the current backlash is a result of the on-going economic gloom, which in the case of Pakistan is far-far deeper than the international subprime crisis!
Posted by: ali sohail | July 19, 2008 at 02:15 AM
Dani,
Pump and dump is illegal in the US and the SEC assiduously follows up on it.
Additionally, dave is right, insiders invariably take a bath when their company stock gets pummeled.
You've been in the People's Republic of Cambridge too long. Time to venture into a locale where everyone doesn't belong to the same party.
Paranoid ramblings outside your area of competence does a disservice to your more credulous readers who take you at your word.
Posted by: happyjuggler0 | July 20, 2008 at 06:42 PM
I must admit i am getting a bit paranoid, although i am sure it is not from spending too much time in PRC. Pump and dump by the way is illegal everywhere, yet it happens. It clearly was taking place in the MBS market and hurt the less informed investors.
Posted by: dani rodrik | July 21, 2008 at 04:08 AM
My friend's old boss made nearly a billion dollars doing something similar at the CBOT in the '80s and '90s. He would lure traders in by flooding the market with bids. Then he'd sell into the buying frenzy. It got easier when the market went fully electronic.
Posted by: internet stranger | July 26, 2008 at 11:16 PM
"In other words, a casino where the house holds all the good cards."
Isn't this always the case? I guess we shouldn't be surprised. Why shouldn't it be the same when it comes to pump & dump and insider privilege?
Posted by: Treating Anxiety | July 29, 2008 at 11:41 AM
Making a plan in which it will helps your company more productive and a technique in which more people will patronize the product. You have to be creative enough to make a good strategies and will be result to a positive response of the people.
Posted by: David | September 17, 2008 at 05:14 AM
Investors are looking for a solid way to take advantage of a possible up spike in the NASDAQ exchange and the stock market as a whole. We are stepping away from our usual discussion of penny stocks and focusing on two Exchange Traded Funds (ETFs). www.speculatingStocks.com
Posted by: Stock Picks | December 03, 2008 at 11:19 PM
Earn $1000 per day working from the comforts of your home! Save gas, time, and money. Start the new year off with a bang!
http://www.cbsoftware.info
Posted by: software | December 18, 2008 at 01:14 AM
It indeed gives them a strong incentive to inflate the value of the firm prior to their stock releases, and then come up with bad news in the aftermath to readjust the value of the firm. Nice article.
Posted by: anxiety cures | May 21, 2009 at 10:53 AM
penis enlargement products and penis enlargement reviews that discover top penis size enlargement pills, patches, oils and devices that gain 1-3 inches gain in your penis size at www.penissizeenlargement.net
Posted by: penis enlargement | July 11, 2009 at 09:26 AM
There are many discover natural penis enlargement products and methods on the market today. Here are some products from which you can choose penis exercises, penis devices, penis patches and top rated best penis enlargement pills – Permanent penis enlargement through penis erection pills, buy VigRX Plus male enhancement pills increase penis size. More info men’s health (All-Natural Herbal Sexual Enhancement Products) at www.male-sexual-styles.com
Posted by: penis enlargement | July 19, 2009 at 11:33 AM
This is gonna huge, i just cant belive it that i am standing at a great blog of my life, i am really glad to have my comment here in very decent topic. thanks to webmaster.
Posted by: Acomplia | July 20, 2009 at 04:05 PM
hello webmaster! i am really appreciating you for your kindness that you have made a really interesting blog and pick all the great topics for which peoples are always seeking to get information and share their ideas. Great work Man and keep it going. God bless you!
Posted by: enlarge penis | July 31, 2009 at 02:51 PM
The aim in Pakistan should be to strengthen the Karachi stock exchange and let its economy grow so that the stocks have sufficient depth that it can not be manipulated by a hand ful of operators. Indian stock market has also gone through a number of such instances and post liberalisation since 1991; it has given sufficient teeth to SEBI to crack a whip and keep the evil elements at bay. Regards
Analyst
Indian-share-tips.com
919256644577
Posted by: Indian Share Tips | September 19, 2009 at 02:52 PM