Every time the market crashes, Finance Minister P Chidambaram rushes to inform the media that "there is nothing to worry about". He did it again last week when the Sensex fell on Tuesday, but it only dropped a couple of hundred points more. Even a cursory look at the movement of the benchmark Sensex would tell the finance minister (FM) that there is indeed a lot to worry about. Excessive volatility that has the Sensex dip 1,000 points (from 13,972 on December 7 to 12,995 on 12 December) and retrace two-thirds of the fall (13,614 on December 15) in seven trading sessions is abnormal.
These numbers probably reflect those mid-week phone calls by a group of powerful operators to friends and financiers, confidently assuring them of a powerful recovery in indices before the weekend. Since the FM makes it a point to keep in touch with market players, he is probably aware of these calls too. As also the fact that one particularly discredited speculator, who vigilance and revenue agencies continue to treat with kid gloves, has turned significantly more active with funds provided by a poultry farmer and a gutka maker.
My sources say that the recovery on Friday may have been stronger, but for the collapse of a Pune-based cooperative bank. The bank’s funds are rumoured to have found their way to the capital market through cronies of the same operator, whose antics have already destroyed two banks. If properly pursued, the money trail could give the regulator some important leads.
But let us for the moment ignore the hypocrisy of the finance ministry’s much-touted whip cracking against tax evaders and focus on some numbers. This column has long argued that a bunch of non-transparent foreign funds work with select Indian operators to profit from deliberately engineered market volatility. Violent price swings continue to point in this direction.
A comparison of volatile market movements during the calendar year 2006 in three markets spanning different continents shows that India is significantly more prone to excessive price swings. Lets start with the Nasdaq composite index, which is rather more volatile index than the staid Dow and includes more speculative tech and biotech stocks. The Nasdaq did not register a single 3% movement in all of 2006 and registered a 2% swing only 11 times. The biggest movement in the index was a gain of 2.9% on 29 June.
Lets now look at the Brazilian Bovespa. It is a part of the fancied BRIC economies, is significantly more volatile than the Nasdaq and also attracts more speculative interest and foreign investment. The Bovespa swung over 2% in a single trading session on 47 occasions. In this respect, it was somewhat similar to the BSE. The Bovespa showed a 4% plus swing on six occasions as against 8 times by the BSE Sensex.
But a better indicator of manipulation or savage volatility is probably a movement of over 5% — the Bovespa had none in 2006. As against that, the BSE Sensex fell a whopping 6.8% on May 18 and suddenly soared 6.9% on June 15.
These numbers suggest that the economy may be doing fine, but stock market manipulation ought to be a worry. Excessive volatility, denoting unbridled speculation, must be checked if the government wants to persuade pension funds to invest even 5% of their corpus into equities. In the absence of any social security, the government must at least ensure that the lifetime savings of salaried persons are not put to risk due to ineffective supervision of the financial markets.
Excessive volatility must be checked if the government wants to persuade pension funds to invest even 5% of their corpus into equities
This brings us to the Securities and Exchange Board of India’s (Sebi) much touted Integrated Market Surveillance System (IMSS) that finally went online on December 1. The Indian regulator is just one among five, worldwide, who have such a system and the only one which integrates data from stock exchanges, clearing corporations and depositories on-line.
We now need to know from the regulator whether last week’s violent volatility was just a case of irrational exuberance/panic or whether the IMSS has thrown up any significant findings. Meanwhile, it must be mentioned that even without the benefit of a sophisticated surveillance system, data crunchers have found abnormal spikes in scores of relatively unknown stocks during 2006. These are neither justified by their financial performance or by market momentum and are clearly crying out for a full-fledged investigation.
Just before this round of extreme volatility, top Sebi officials told us that a set of investigation notices have already gone out to some little known companies that have exhibited significant price spurts. This may have been good enough earlier, but not anymore. Investors are more keen to know if the IMSS exposed any significant trends or linkages hinted at by those strange price spikes that are evident to any investor watching the trading screen all day. Sebi will have to quickly signal that the IMSS system can actually capture abnormal trading activity and use its integrated databases to go after speculators.
This is a small window of opportunity for an effective surveillance system to nail manipulation strategies that have worked equally well in the open outcry systems of 1992 as the automated trading platform. Over time, speculators will come up with new tricks to cover their dodgy trails. We in India are still waiting for that first confidence-building round of timely detection, followed by quick action and stringent regulatory action that will stand the scrutiny of a higher judicial forum. When it happens, it will be more reassuring than the finance minister asking people not to worry.