05 Feb 2018 16:17 IST

How to check pump-and-dump operators

Keep lower circuit at 1/10th of upper band

Investors have been duped time and again by operators despite several efforts by the exchanges and market regulator Securities and Exchange Board of India. In recent times, these operators have been using SMSes and the social media. Stocks that are ‘guaranteed to double in one month’, and ‘certain buy calls’, are often the subject of SMSes.

Exchanges do take pro-active measures based on the analysis/processing of alerts generated based on various parameters and other inputs such as news, company results, etc. They have a separate cell to detect potential market abuses at a nascent stage.

To reduce the ability of market participants to unduly influence the price of securities, the BSE and the NSE take surveillance actions such as reducing circuit filters, imposing special margin, transferring securities to trade-to-trade settlement basis, and suspending securities/ members from the market, among others. While these actions are welcome, operators still find ways to lure investors and dump dud stocks on them.

Watch Aarati Krishnan explain how the stock markets decide their 'time-outs' and why

The first move by the exchanges after identifying such volatile stocks is to impose circuit filters so that the stock does not run up sharply. But the circuit filter rules, as they exist now, can be tweaked to make operating a stock difficult.

Dumping job made easy

Instead of a blanket rule, exchanges can have two separate circuit filter mechanisms for the same stock. Currently, if a stock attracts 20 per cent circuit filter, it cannot go up beyond 20 per cent or fall below 20 per cent in a single session. That makes the job of operators easy. They can complete dumping of the stock on weaker hands within a few days after jacking up the price. Assuming a stock that is quoting at ₹100, at a 20 per cent circuit, the stock can shoot up to ₹206 in about four days; but from that high it will take just three days to get back to the current level. While keeping the circuit filter on the upper side at the higher range, exchanges can consider reducing the lower circuit to one-tenth of the upper circuit band. That means, for a stock that can rise 20 per cent, it cannot fall below 2 per cent in a single session. If the downside is protected, the fall will take more number of days than the rise, trapping the operators.

Though exchanges can help only to a certain extent, it is investors’ responsibility to analyse the risks before investing in stocks.

(The article first appeared in The Hindu BusinessLine.)

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