Friday, August 10, 2012

Bear Cartel - II


So as I'd written earlier, I went through the SEBI order on the sudden mid-cap stock crash and as is the case with most SEBI orders, I found it written up beautifully. You should really try reading some of these sometime.

I'll try to quickly summarize; my thoughts at the end.
  • On July 26th, between 9.15 and 9.50 am, prices of Pipavav Defence (PDO), Parsvnath Developers (PVD) and Glodyne Technoserve (GDT) fell suddenly and without cause by 20% and that of Tulip Telecom (TLT) by 25%. The marke, and SEBI, went WTF?!?
  • NSE and BSE both dug into the list of sellers and came up with the list of 19 entities which I'd posted here.
  • The net sales by these entities in those four stocks ranged from 51% to 95% of the market on NSE and 31% to 58% of the market on BSE. They underbid on the stock by as much as 36% in some cases. They were acting in unison i.e. one after the other. One would place an order and after that got executed, someone else would place another order and so on. And as one or two were driving prices downward, other group entities were buying up the shares. 
  • SEBI dug into these entities and came up with inter-linkages between them such as:
    • Common phone numbers
    • Common address
    • Directorship in other entity
    • Common CA (I found this brilliant)
  • One of the guys, Ajit Kumar Jain, was found to have links with companies that had been banned in the past for price manipulation.
  • A particularly neat touch was when SEBI pointed out that these guys don't really have the stated income to be trading in crores of rupees. Most of them were nil or upto 5 lakhs, with two or three above 25 L.
  • These companies, since Jan. 2012 were totally into trading these four scrips and nothing else. 11 of them traded these 80% of the time or above.
  • From the order, directly,
22. In my view, generally, a seller would rationally seek a higher price to sell his shares; however, in this case the clients were placing sale orders at prices lower than LTP, thereby bringing down the price of the scrips. More importantly, normally a seller would desist from revealing its entire sell quantity since that may cause the supply-demand balance to immediately become unfavourable to the seller. The data for the short period of time in each scrip indicates several instances of fully disclosed orders which were also a significant factor in causing the sharp decline of approximately 20% in price of each scrip.
23. One basic premise that underlies trading on the stock exchanges is that the clients conform to standards of transparency and ethical behavior prescribed in the various regulations and statutes, relevant in this regard and do not indulge in fraudulent , manipulative and unfair trade practices while dealing in securities. In this case, the above trading pattern of the clients’ prima-facie indicates that there was a concerted attempt to artificially manipulate/depress the prices of these scrips in a disorderly fashion thereby adversely affecting the integrity of the securities market.
  • And then, BOOM, you're barred from the markets pending further investigation.

But seriously, what were these guys thinking? Did they really think they could get away with something as blatant as this? I am also thinking of the ways in which they could have pulled this off without alerting the regulator.

First of all, get different SIM cards. In today's day and age, that should seriously not be a concern. Register different addresses. I'm sure these guys have enough bogus addresses or shell companies listed anyway. So choose carefully. These two should be no-brainers, really. 

Now it should get interesting. They'll need different companies, obviously, operating out of the different premises and having different phone numbers, but they'll need different directors too, or else they are related parties. A public limited company needs seven minimum while a private limited needs two. That gives a minimum of four people, in two pairs, establishing a buyer and a seller. Because if they short a stock and someone else buys it up they’ll end up losing loads of money. The timing has to be co-ordinated. You need to establish a pattern of trading across various stocks before zeroing in on the two-three you want to short. Don’t concentrate 80% of your trading in those.

I’m still not convinced. If one set of companies does all the selling and another apparently unrelated group of companies does the buying, doesn’t it become obvious? Maybe the ‘operators’ should settle on less greed. If you end up causing 20% price-drop in 30 minutes, you are bound to raise eyebrows. Why not 5% across multiple scrips, snap ‘em up and sell them back at normal price? Given the crores in which they deal, even 5% would be a significant amount. But 20% is pushing it a bit too far, I think. Plus it gets you debarred.

Use different CA’s for the companies. That also should not be a problem, ideally.

Ideally, you’d have 5-6 different set of companies, 6-7 companies constituting a set, operating throughout India (think Golden Quadrilateral), co-ordinating via Skype (no telephone trails), selling and buying throughout a session (this would require some serious cash, but I think they might have that covered). Choose your timing, in the best case scenario, you should only trigger the selling and spook the market enough so that they start panicking and selling. That might be a tough nut to crack. Make sure the individuals and companies involved trade across a range of scrips before settling on the one you want to manipulate. Random distribution of profits would ensure everyone gains in the long-run, and collusion is difficult to prove. This is all a bit too simplistic, yes?

Establishing 30-40 private limited companies in India would not be a big issue for the concerned parties. An enquiry here would involve seizure of communication equipment and I don’t think SEBI is authorized to do that. SEBI’s the regulator, not the police. How do you prove collusion when there is (apparently) no contact between the parties? They might be best friends but in the absence of documentation, even friendship is hard to prove, no?

If you’re a party who knows how shit goes down and are laughing your guts out at me, let me know. I’d love to learn. (Not that I’d use it, of course, but knowledge and power and all that jazz...)

If you’re SEBI, what’s your workaround for this? Do you even need a workaround for this?

Again, putting it on paper is a gut-wrenching reminder of absolutely how much I have no idea.