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SEC surveillance on a stock market guru

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A heavy hitter in the stock market ‘game’ and currently rocking the Colombo Stock Exchange (CSE) is being probed by the capital market regulator.

The Business Times learns from highly placed sources in the capital market that these investigations were started a few weeks ago when certain stocks recommended by him on social media sites started soaring in price for no apparent reason. His social media accounts are being monitored, the sources said on Tuesday.

Analysts said that at the risk of taking flak over not rejoicing in the unprecedented highs the CSE is experiencing now, it is important to consider some home truths adding that stocks that are going up in price are doing so on false sentiment noting that these shares do not reflect their fair value.

Some old stock market ‘mafia’ members with old habits have gained traction on social media with an army of young followers who are not exactly informed about what these ‘big boys’ were up to a decade ago, one analyst remarked.

“Social media usage is rampant promoting these illiquid shares with graphs and charts by those with little to contribute to the stock market highs/potential highs.”

Some of those promoting the shares allegedly have alias accounts – basically, it is the same person with a few accounts bombarding the new investors who have joined stock trading with promotions on social media when the CSE and capital market regulator, Securities and Exchange Commission (SEC) digitalised trading last year, he said.

Finally, anyone opposing this trend in the market is branded as ‘jealous’ or some such by those leading the charge in the manipulation game. Mostly journalists are branded into this category, which was also the case 10 years ago when similar incidents brought the market down. Another case of old habits die hard.

“It is indeed sad that more and more new investors are falling prey to the false campaigns orchestrated by the mafia and self-proclaimed masterminds of the stock market,” a stockbroker noted. The CSE’s main index, the All Share Price has gone up to 9,000-point levels from 2021 January’s 6129 points. Strikingly, eight stocks – Expolanka, Royal Ceramics, Vallibel 1, Harleys, LOLC Development Finance PLC(NIFL), Browns Investments, Commercial Leasing & Finance PLC (CLC), and LOLC have been instrumental in pushing the index to these highs over the past eight months.

The stock market is not independent of the economy and the formal and informal market trends indicate there will be hyperinflation within the next two years. “Food rationing, gas and milk queues, currency depreciation, and an overbearing pandemic with no end in sight have stretched their hopes,” an analyst told the Business Times on Tuesday. He added that this fear of an impending disaster is preventing them from holding cash in the banks. In this backdrop most traders prefer to put their money in dollar-earning, asset-rich stocks, he said. For example, fan favourite Expolanka PLC is trading at 15 times its net asset value.

Agreeing that the exchange rate situation has pushed new investors to the stock market, another analyst pointed out that there is a lot of circular trading going on – which is essentially buying a particular stock at a low price and selling high very frequently by the same people. “They don’t care about fundamentals.”

He also stressed that the current behaviours in the stock market reflect the dangers in the economy and the initial signs of it collapsing.

Easy manipulation of illiquid stocks happens because of just that – being illiquid which is having a low public float. The CSE was talking about a free float-adjusted market-weighted index. “We have started work on it. It requires a lot of back-testing and we have already done five years of back-testing so far.

The sector indices also have to be updated,” a CSE official said. Analysts welcome this saying that with such a move the distorting effect will be eliminated as the index is calculated by the free-float adjusted market weight.