Dear Upcoming Stock Manipulator,
You have heard from all sources that stocks are manipulated, which is why you want a piece of the action. While we cannot hope to enumerate all the methods by which you can steal money from the pockets of retail investors, we can provide you with a few starting points.
In the large number of stocks available in the country, the real information is available only to the management of companies. Before results are announced, results are already known. All you have to do is to find that inner circle of people that are aware of such details, or tap into the auditing or consulting agency and find "impressionable" people who are responsible for drafting such results. Or find the investment banker responsible for a merger or acquisition. Or get information about a private placement to a large institution from its employees. You might think it is only the young or the less-well-heeled that can be bought with money, but that is the thinking of a beginner, a rank amateur at the art of manipulation.
The biggest fish are even more likely to be "bought", as long as you disguise the purchase as a regular business transaction. Where a direct offer for rewards in return for information doesn't work, you invite the person over to "exclusive" parties, pay for an upgrade of his family's tickets when they go for a holiday or befriend him in the promise of a lucrative position in a company you will eventually create. The promise of power, fame and exclusivity is intensely attractive, even to those without the need for material trappings. Such attractions seem like legitimate benefits of friendship, and it brings across information the general investing public can only dream of.
All you do then is to buy or short the stock with the information you have. Remember of course that this can go wrong — insiders, having found that their information can move stock in the direction they want it to go, might throw about wrong information to suit their own needs. But that's the risk. A smaller risk, you will admit, than acting purely on public information, otherwise known as "being fed to the vultures".
Recently, in very bad news for the insider trading industry, Raj Rajarathnam, a famous hedge fund manager was found guilty of insider trading as if it were a sin. It is truly disturbing that our industry that has been flourishing for decades has been singled out for treatment by those who think that everyone should have access to the same information. The fools.
The Circular Trade
Stocks move up based on demand, and when people see there is demand, they come and buy thinking there is more demand. In such a situation, it is useful to "manufacture" demand, by buying and selling to yourself. Because you can't really do that, you involve a friend, buy certain shares from him and then sell those shares to him back at a higher price. Continue until others have jumped into the fray and taken the share price to levels so high that you can sell and exit at a profit.
Every once in a while SEBI will detect and discover such circular trading activity. Have no fear, because all SEBI can do is to scream and ban you and your friend for a while. Then, open an account in your nephew's or niece's name and continue your activity. They can't stop your account, but they can't take your money (yet). And if they do get tough, go to the Securities Appellate Tribunal, then to the Supreme Court, and eventually, like Reliance promoters attempted recently, request a "settlement". You might pay about 1/50th the amount of profits you would have made, which is a small percentage of the Income Tax you didn't pay last year.
Pump and Dump
A variation of the circular trade method, here the idea is to use news to pump your stock up, add some money and then transfer the stocks to greater fools.
In India, you will hear "tips" from operators who keep a stock price high by using large amounts of cash, and then dump it on unsuspecting investors after some seemingly bullish news comes along in the manner of "Shell oil considering acquisition of small toothpaste cap manufacturer". This simple method never fails to line your pockets, having bought at a very low price, usually in collusion with promoters.
Our heroes are Nirmal Kotecha and P S Saminathan of Pyramid Saimira fame, who along with a journalist Rajesh Unnikrishnan, forged a letter from SEBI asking them to buy shares of the company in an open offer at a price much higher than the existing market price. The stock zoomed up and then crashed and when SEBI unearthed the scam, Kotecha had already exited. Later in March 2011, another SEBI order revealed that the promoters made up the financial accounts — a large number of the "agreements with theaters" never even existed, and a good portion of their revenues were fictitious. It should be a matter of great pride to budding stock manipulators such as you that a stock could have gained so much attention.
When you have some money and stocks trade in miniscule volumes, you can easily move the market by just your actions.
Using money power isn't a big deal. Even Warren Buffet, in 1974, manipulated a penny stock (thanks James Altucher) so that the price would stay high, and paid a $115,000 fine (although he kept buying high so that he could buy the entire company, and that's a terrible use of money when he could have manipulated the stock instead).
The Hunt brothers, in the mid 1980s, tried to corner the silver market by buying all the silver available. They succeeded in driving the price up to $50 then, a price it hadn't reached till 2011. Real estate developers buy their own flats in proxy names and then claim there is too much demand and the price must be hiked.
Hedge fund manager and media personality Jim Cramer sums it up in a video, that they just keep hitting the stock until the person on the other side gives up.
This is not just a refuge for you; it is now being done even by governments. The US Feb buys treasury bills and long term US bonds, and sometimes even junk mortgages, just to keep their prices high. India doesn't like the rupee strengthening against the dollar, so it buys dollars and keeps the exchange rate down. Of course, they have the excuse that they are not just buying to sell it at a higher rate — they buy to hold — but why should such flimsy reasons stop you? If the prices go out of control you can always sell and if asked, say that the "market behavior had changed" and you no longer wanted to keep the stock.
If you think you need a lot of money to manipulate stocks, you are wrong. The smallest stock in the Nifty trades just Rs. 10 crores ($2.2 million) a day, and most stocks beyond the top 200 will find it difficult to even trade Rs. 10 lakhs ($22K) per day — it doesn't take a lot of money to raise the price, or indeed to "show" the presence of a large buyer.
And if you are caught
You will of course have to burn this letter. But have no fear — even if you have manipulated markets as much as Ketan Parekh has, you will find easy ways to come back into the markets, using other people's names and accounts. Nothing will ever happen to you — what, after all, has happened to the bigger political manipulators and scandals? If there are suckers waiting to make losses, why shouldn't you be the beneficiary?
On that note, we invite you to write in with more lucrative and innovative ways to move stocks according to your whims and fancies. And let us know which stocks.
The Secret Committee of Asset Manipulators (SCAM)