This is in connection with my letter published in Business Recorder of February 24, 2007 wherein some basic questions on the outset of overall Corporate Governance and generally depleted state of bourses in Pakistan were raised.
It was quite surprising to see a response from the Managing Director of a bourse which is not even operational after squandering tons of money in the first place. And secondly, the language used by the angry young man was more of a Lashkar-e-Jhangvi reflecting the juvenile delinquency in corporate affair.
I beg to submit certain eye-opening facts for the consumption of the "MOF" general body of mutualized bodes having sizeable stakes in Commodity Exchange through this letter addressed to the Editor of Business Recorder.
The KSE Market depth data (available to NCEL) lists the entire buy and sell orders in the market (MBP) for a particular security to facilitate a broker with decisive information to see if there is sufficient liquidity for its client to sell a particular security. Henceforth, the Market Data Depth depicts the number of price levels and quantities for purchase/disposal by the market participants at scrip level on real-time basis. This is often termed as "Spread". The Market By Price (MBP) feed of KSE is equivalent of internationally recognised Level II/III, Stock Market Depth Data Feed, which is an instrument of speculative traders for framing trading strategies in a running.
Trading spreads can be instrumental in facilitating the front running activities as it is cheaper to enter a limit order at a better price and reduce the downside risk of the market moving against the front running activities, thereby facilitating the large investors to manipulate the market. As pushing the market up or down by one spread is routine chores under formulating a trading strategy, it is prone to tempt bulk players to capitalise the benefit of widespread rampant amongst illiquid symbols, which currently houses an overwhelming majority of listed securities at KSE. In many countries, including United States, it is a criminal offence to conduct any market manipulation in any form either by pushing the spread or by using information which is not public to 100% market audience on the Ready and Stock Future Options. It is perhaps innate in human nature to try to personalise events. However, the equity market is a great achievement of institution building by the Finance Ministry of Pakistan. A lot of what happens on the equity market goes beyond what any small group can grossly engineer. It is important for Mr Jang to understand that section 9 of US Securities Exchange is very conspicuous on market abuse through Market Depth Data.
According to Section 9 of the Securities Exchange Act of 1934, it is unlawful for one or more persons to effect "a series of transactions in any security registered on a national securities exchange or in connection with any security-based swap agreement with respect to such security creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others".
With the invention and popularity of Level III quotes (KSE MBP), it is possible that a group of traders can see where a surplus of buy or sell orders is located, but as Section 9 makes clear, the manipulation of a security's price for the purpose of inducing purchase or sale of the security is illegal. An example of such market manipulation would be the practice known as "ghosting".
Stock exchanges, such as ours, are required to enforce the provisions of the Securities Exchange Act of 1934, which covers not only market manipulation but also other matters such as misconduct on the trading floor, insider trading, customer-related sales practice violations and other types of abusive trading practices.