If anything, they seem to be more ignorant in a transparent, automated country-wide system
What Technology Means To Investors
By Sucheta Dalal
A decade ago, the stock market was shallow, primitive, plagued by delays and defaults and easy to manipulate. Yet, the open outcry system, with jobbers recording trades on the floor of the exchange, was also transparent. Nothing was secret in the jobber-based network.
Players who were pre-disposed to being bullish or bearish were clearly identified; so were the herds or cartels in which they operated. Sometimes a big move in a particular stock was signalled with a swagger when a big operator personally entered the ring to buy all the stock on offer or trigger panic by pressing hefty sales. There were no laws for insider trading or price manipulation and leading brokerage firms were proud to be known as house brokers of the Birlas or the Tatas.
The acme of such personality-oriented trading probably was the Harshad Mehta led bull run, when investors, jobbers and punters made it their mission to figure out which scrips were attracting the Big Bull’s attention.
Since then, the markets have changed and grown beyond recognition. We switched to an order driven, automated, anonymous, single screen trading system, which swiftly spread its footprint across the country. Trading volumes and the number of brokers grew exponentially, along with the rise of the National Stock Exchange (NSE) to market leadership position. This system is supposed to be more efficient, transparent, difficult to manipulate and in the best interest of investors.
Yet, in many ways, the secondary capital market has turned dangerously opaque. The first indication of this ought to have been the Ketan Parekh led scam of 2000. But shoddy supervision by the Securities and Exchange Board of India and a sloppy, long drawn investigation followed by a disinterested Joint Parliamentary Committee ensured that few lessons were learnt from that debacle, even though it had brought the mammoth Unit Trust of India to its knees.
For instance, Ketan Parekh who had learnt his trading tricks as a follower of Harshad Mehta, also built a following around himself by publicising his big investments. This time, a fawning media ‘watched’ and reported his every move. Yet, when Parekh and his K-10 stocks hit the headlines everyday, the regulators failed to detect that he was bleeding the Madhavpura Mercantile Cooperative Bank or using Overseas Corporate Bodies (OCBs) as fronts. Banks and OCBs are both the Reserve Bank’s responsibility, but SEBI also failed to investigate his trading. There was also another surprise. That a large corporate house — Reliance Industries — had deployed a massive Rs 2,000 crore to provide liquidity in the two national exchanges. The sudden withdrawal of funds by Reliance did exacerbate the fall in prices, but the rest of the market was clueless because only insiders knew of its investment.
If the lack of transparency led to some serious shocks in 2000, last week was no different. Almost all fund managers, investors and technical analysts (barring one or two) were bullish about the market at the end of the previous Friday when the market shot up (pulled up?) towards the end. Yet, on Friday, the benchmark Bombay Stock Exchange (BSE) Sensex closed 256 points lower, creating a suspicion that Friday’s rise was a set up. Another two days of slide, 180 points and 120 points on Monday and Thursday, all but set off a panic. It also raised many questions, to which the “transparent” system provided no answers. For instance, were big players deliberately driving prices down over the last month? Did these players include advisors to the PSU issues and a large corporate house, as alleged by the disinvestment minister? Or was it just a reaction to international capital market trends?
And who were the large sellers last week when the Sensex dropped 256 points? Foreign institutional investors (FIIs) are now the dominant players in the Indian capital market. But nobody knows how many Indian industrialists, speculators and politicians are hiding behind the facade of FII investment. The government has made t clear that it does not want to know.
The next question is, did they sell heavily in the last month? The FII investment numbers put out by SEBI show that they have been net buyers everyday. But again, nobody knows the composition of these figures and whether they are reported and compiled accurately — no details are available to the public.
Take a look at FII investment data since September 2003 when the market was surging everyday. On an average, FIIs have been churning anywhere between Rs 20,000 crore to Rs 29,000 crore worth of stocks every month (except November 2003 when it was Rs 15,000 crore) in the cash segment. In January and February 2004, their total cash market operations were Rs 29,000 crore and Rs 27,000 crore respectively. And in the first 19 days of March, they have traded Rs 18,000 crore worth of shares. That makes for a massive Rs 74,000 crore worth of transactions in just 2.5 months. Incidentally, FIIs have been net buyers in the cash market, but are net sellers in derivatives.
The same absence of details apply to the big corporate house, whose actions in depressing and ramping prices continue to be whispered about. For instance, some punters believe that the depressed prices over last week were only meant as a psychological springboard to trigger a big upward move, which the regulators would not dare to question.
Is any of this true? And are the regulators really unable to detect possible price manipulation? Officials familiar with market supervision believe that stock exchange officials simply cannot be so clueless. Moreover, SEBI was swift enough in detecting selling by PSU investment advisors when the disinvestment minister demanded information.
Does this mean that the regulators’ know but investors are in the dark? What is an ordinary investor to understand when the regulator admits to being on “red alert”? Does it signal a potential scam, or is it a rhetorical response to the government’s panic over the erosion of the feel-good effect. The irony is that investors are more ignorant in a transparent, automated country-wide system open as much to global investors as it is to a small investor in Manipur, than they were when a two-hour trading in midday along a narrow lane in Mumbai was in the hands of a handful of insiders.