It would appear from newspaper reports that the Securities Exchange Commission (SEC) is pleading lack of power to supervise the Stock Market. But is this correct? Didn’t previous regulators punish insider traders and market manipulators? The Colombo Stock Exchange (CSE) and the Securities Exchange Commission often say that they have modern market surveillance software to monitor trade while they are being executed. Why then didn’t they take action when market manipulations took place? Market manipulations take place when a ring of investors buy and sell a particular share among themselves at higher and higher prices hoping to attract retail investors to speculate.
They spread the word among the stock broker community that such a share will go up to such and such high price to induce small timers to buy the share as it keeps moving up. Then those in the ring quietly unload their shares before the forecast price is reached, catching the small timers who expect that the share will go up to a much higher price as falsely told to them by the broking community. These small timers are not on the spot to observe the price movements and give orders beforehand. When doing so they give the brokers the order to sell at a much higher price which will never be reached. Why couldn’t the surveillance software detect such manipulation in the share price? Can the SEC officials plead ignorance?
The CSE had a well-known rule limiting the credit extended to a client to not more than 50% of the value of his portfolio. This rule was flagrantly violated by several Investment Advisers. What action has the CSE or the SEC taken to punish these Investment Advisers? It is not enough to blame the high net worth individuals. These individuals could not have manipulated the market without the knowledge and acquiescence of the broker firms they traded through and the particular Investment Advisers they dealt with. These Investment advisers have aided and abetted the market manipulators. The SEC has now banned trading by employees in stock broker firms. Well and good for the future. But what about those Investment Advisers who deliberately violated the 50% credit rule and allowed high net worth investors to indulge in excessive leverage?
It is said that some broker firms gave free credit without charging interest and thereby allowed those clients to manipulate the market. The officials of the Colombo Stock Exchange and the Securities Exchange Commission regularly visit he offices of the Broker firms and check their records. Surely how did these inspecting officials miss the violations of the 50% credit rule? How did they miss the churning of the accounts of innocent clients? Churning refers to the buying and selling of shares by an Investment Adviser merely to earn commission for himself or herself, with no gain to the client but he has to foot the bill for the brokerage on such unnecessary trades. Sometimes these trades have been done to hide the facts from the CSE and the SEC.
Some Investment Advisers have used proxy or dummy accounts in the names of their brothers, sisters’ parents and in-laws to trade for themselves. When the market fell these Investment advisers have failed to pay up and instead they saddled their broker with the losses incurred by them through such proxy accounts. The SEC should investigate how many stock broker firms carry bad debts in their books. They must insist that such bad debts be written off. We turn out many persons with qualifications in Accountancy and Finance but hardly any seem to have experience in markets. Some Universities in USA ask undergraduate students in Economics or Finance to engage in some market play themselves. They may be called upon to sell limes or oranges to get firsthand experience of the operation of markets. But our universities merely dole out lecture notes prepared by lecturers who also have no first hand exposure on the working of markets.
This country has a surfeit of Rules but hardly any of them are enforced. This penalizes the law abiding and the honest at the expense of the law breakers and crooks, who choose to ignore rules. The SEC cannot plead that it wants more stringent laws. It has enough power and has also made useful Rules. But the officials are either incapable or lack understanding of how to detect irregularities in the Stock Market.
But criticizing the SEC or the investors is like shedding tears after the milk has spilt. The Stock Market is driven by sentiment and excessive criticism with press publicity undermines the long term growth of the Stock Market. Mere adverse media publicity will not help to stabilize the market which has so far fallen by 20% this year. It is time that the market stabilized and this is not taking place because of irresponsible criticism.