On Indo Stocks: Price Manipulation (Part II)
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This is part II of Indo Stocks that was promised in part I. If you missed the first part where I talked about weakening currency of Indonesia against USD overtime, head over using this link. In the middle, Budi also wrote about #kaburajadulu market crash, is it a crisis? Or an opportunity? You decide.
Before we begin, let me say that you will hate reading this article if:
You think that market is perfectly efficient
You think that price of a stock (or a security) cannot be controlled by an individual or a group of individuals with sufficient capital
You think that price manipulation is impossible because it is illegal and law enforcers have done a perfect job in catching all price manipulators
If you think that any of the above is true in practice, feel free to close the article and stay tuned for the next one 👋🏿
Let us also be clear that price manipulation, especially one that harms other parties in anyway, is an immoral and unlawful act. But it is arguably not uncommon. People might think that this phenomenon only exists in Indonesia because people might think that Indonesia is gelap (dark). But what if I tell you that JP Morgan also takes part in manipulating prices of precious metals? Some of the traders even got sentenced.
So this is a very serious matter. And if it is not clear why this is illegal, this quote from the shared link above captures the essence well.
“As today’s sentencing demonstrates, the FBI and its partners remain committed to investigating and bringing to justice anyone who attempts to manipulate our financial markets for their own selfish gain. In order to maintain economic security, investors in equity and commodities markets must have confidence that exchanges are operated in a transparent and equitable manner, and that investments are free from manipulation and fraud. Today’s outcome should serve as a reminder that the FBI remains highly focused on combatting bad actors conducting sophisticated fraud schemes targeting the securities and commodities markets.”
- Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division.*
But it should not be a taboo to talk about price manipulation and pretend that it does not exist. In fact, we should really be informed about it so that we can be more aware and vigilant. For example, burglary or pickpocketing is an unlawful act. However we definitely never pretend like it does not exist. We instead spread safe guard measures to ensure that we don’t get robbed.
So how is price manipulated in the stock market?
First things first, let’s state some obvious statements.
You manipulate price, to make a profit.
You manipulate stock prices when you deliberately try to make a stock to be priced really low, to create a sell pressure so that people would sell their stocks to you at a cheap price.
You manipulate stock prices when you deliberately try to make a stock to be priced really high, to create a buy pressure so that people would buy their stocks from you at an expensive price.
Sh*t posting or pom pomming a stock on social media can be used as a tool by price manipulators to inorganically create fear or greed. But, you are not manipulating the market for having an opinion about a stock in social media, even if the opinion is nonsense (you will just look funny 🤭)
Now that the obvious is out of a way. Let’s briefly touch upon the very simple mechanics. Imagine yourself (yes, you reading the article) being the price manipulator. How would you conduct your business?
Step 1: Engage Public Companies with Business Commitments
Public companies usually have business goals or commitments that they want to achieve in the next time period. For example, they are prepping for a joint venture with another company. Or they are planning to acquire a new business unit.
Now if these business commitments succeed, then the value of the business would naturally increase. Let’s say before the execution of business commitment, your net earnings is 100. After the execution of business commitment, your net earnings is likely to be 1000. Refer to a diagram below:
Now picture Budi as an owner of the company who’s doing this business commitment.
Before Budi does this business commitment, net earnings is 100. And share price is also Rp 100.
After Budi does this business commitment, net earnings is 1000 (a whopping 10x). Do you think he wants to have the shares still to be priced at Rp 100?
Probably no 🙂 Otherwise Monish Pabrai will look to eat his company alive like what he did to a Turkish company. So naturally, you can see that there’s a “want” from Budi to ensure that his share price is not stuck at Rp 100, once he does his business commitment.