KARACHI: Stock prices are not that difficult to manipulate. In fact, if you are a big enough player, it is fairly easy. This lends some credence to the argument by those opposed to the process who say the game is rigged and aimed at benefitting only a certain few.

For some, however, market ‘fundamentals’ are the real drivers and the main reason why they remain hooked to multiple screens, browse through several sources of news, and sift through tons of data to arrive at an informed decision on what to buy and sell. Others, still, find the stock market as an avenue for investment because it is one way to save.

But over the last few weeks, the Pandora’s box with regards to market manipulation, front-running, and other behind-the-screen happenings at the Pakistan Stock Exchange (PSX) has been opened again – and not for the first time. This time, it comes as the KSE-100 hits a record high in every other session, and closed on Monday at 71,433.46 – its highest closing level as of April 22, 2024.

Investigation during a time of record high

The most recent event involves the Securities and Exchange Commission of Pakistan (SECP) filing a criminal complaint against what it called “suspicious trading activity” during a three-month period – October 01, 2021 to December 31, 2021 – and finding a “high percentage of sell-side trades of a client – which it mentioned as accused number 1 Abdul Basit – matching with State Life, listed proudly as Pakistan’s largest state-owned enterprise on its website.

The accused number two, Abdul Waheed Shaikh, is listed as the person authorised to place orders with the brokers on behalf of State Life.

In its complaint filed in the Special Court (Offenses in Banks), Karachi earlier this month, the SECP said an analysis of trading data revealed that during this three-month period around “95% to 100% trading conducted by Basit in various scrips (shares) matched with State Life”.

“Accused number 1’s trading pattern during the review period was entirely different from his previous pattern as he became a day trader and settled his position on daily basis,” the SECP said in its complaint, a copy of which is available with Business Recorder.

“During this period, he realised a gain of more than Rs8.139 million. It was further noted that almost all of the said profit was earned from trades wherein State Life was the counter party.”

While a gain of Rs8.1 million may not sound substantial, it becomes significant because the KSE-100 – a benchmark for market performance – stayed within the range of 44,000-45,000 in this three-month period.

An analyst, speaking on condition of anonymity because they did not want their name associated with the development, said the amount is hence, significant.

“An average investor wouldn’t have seen their money grow in this period. Yet, here we have a day trader raking in over Rs8 million in three months,” the analyst said.

The SECP said that Kashif Ali, the regulator’s joint director named as the complainant, initiated the investigation and then analysed data from January 1, 2021 to December 31, 2021.

“It noted that State Life conducted almost all of its buy transactions during last quarter of 2021, the same period when accused number one was conducting suspicious trading activity.

“During this period, State Life bought 12.108 million shares amounting to Rs3,987.289 million of seven listed companies namely, Indus Motor Company Limited (“INDU”). Millat Tractors Limited (“MTL”), MCB Bank Limited (“MCB”), Thal Limited (“THALL”), International Industries Limited (“INIL”), Bestway Cement Limited (“BWCL”) and Bank Alfalah Limited (“BAFL”).

The SECP said that 99% of State Life’s total buying was in the first 6 scrips, whereas more than 80% of trading (and most of the gain realised) by the accused number one was also in the same 6 scrips.

“It was also noted that State Life bought 47.32% of its total trade value during the review period alone from accused number one whereas, remaining 52.68% were bought from 861 investors. These facts cannot be considered a mere coincidence.”

The complaint also stated that during the period between January 1, 2021 till March 31, 2022 – a window larger than the review period – the accused number one realised a net gain of Rs7.8 million while his trades in the six scrips saw him realise a gain of Rs7.892 million.

“This shows that net loss was suffered on his trading other than 6 scrips,” the SECP said, apparently questioning Basit’s skills as a trader as he needed State Life to step in and ‘save the day’.

The following two tables have been listed in the SECP complaint.

The SECP said that Basit used to buy and hold shares for a certain period, but during the window being investigated, he became a day trader with “hyper trading activity”.

The SECP stated that matched trades with State Life “in such a high percentage is not possible without prior knowledge of State Life’s trade/order placement information”.

State Life is a big player

State Life, Pakistan’s largest life & health insurer, is a big player in the game. Its 2021 annual report showed its total income higher than Rs271 billion, and its field force alone stood at a little less than 124,000 as of December 31, 2021.

Its investment portfolio was shown to be at nearly Rs1.3 trillion, more than double from what it was at in 2016 (Rs598 billion).

What the SECP investigation tells us

The SECP complaint and the points it raised were not too difficult to gather. With trading activity documented and money-trail easier to follow, the PSX has come a long way.

In fact, many analysts and officials say it is this very requirement – transparency – that discourages people to invest in the PSX.

However, many also have a differing view.

“There is a certain ease with which big players can still manipulate prices,” said a senior official from an investment company who has over 15 years of experience.

“This (lack of actual transparency and market manipulation) has made the PSX less attractive for the common investor. They are scared, and stay away. It is not uncommon for stock prices to move against conventional wisdom.”

Pakistan’s low savings- and investment-to-GDP ratio highlight the lack of participation from the general public. In comparison – not that this is a fair one anymore because the neighbour is now ‘light years ahead’ – India’s market capitalisation stands at a size bigger than its GDP. Pakistan’s market cap is a mere 10%.

Business Recorder reached out to representatives of the SECP multiple times, but did not get a response on whether this was a one-off investigation or if the regulator was going to widen the net.

An earlier report by another media outlet had stated that the CEO of another asset management company was also suspected by the SECP as involved in some personal trading of shares which contravened SECP’s regulations.

An analyst said suspicions on State Life’s trading process is just the ‘tip of the iceberg’.

“All market behave erratically at times. There are reasons beyond your control. Some of them are addressed by information symmetry. As a trader/investor, you want to be better informed. That’s your job.

“But some of it is really designed to ensure others are at the losing end. There is no concept of a winner-winner. In all trades, there is a winner and a loser,” said another analyst.

The SECP, which issued a press release last week detailing its account of the complaint, had not named the entity or the individuals involved.

Ironically, however, the SECP said it is committed to ensure fairness and transparency in the capital market to enhance investors’ confidence.