There's an old saying that crooks have to be honest. For being crooks there are no policemen, lawyers or courts to help them out. Therefore all criminal transactions have to be undertaken purely on trust and the given word or shaken hand. Those that are honest thrive and live to enjoy age and wealth. Those that are not, end up in a ditch somewhere.
There are no old and dishonest crooks.
It's an interesting idea, there's a great deal of truth to it even as it's not exactly and wholly true.
There are those who say that stock markets – even the entire apparatus of capitalism -- are a crooked game. Of course, we don't have to take all that seriously the idiocies of Marxists, but we do indeed have to make sure that such financial markets are honest -- even if they are crooked in that definition. As with the proper thief and his word, buying and selling stocks and bonds and currencies does depend upon being able to trust what everyone else is doing.
That's what is at stake in this story from this newspaper: “The Bangladesh Securities and Exchange Commission (BSEC) is set to take action against manipulators responsible for unusual price hikes of the shares of 17 companies.”
Long-term readers will know that I'm usually against government action -- markets fix themselves often enough. But here this is people acting against the integrity of the markets themselves, which is when significant and severe action is justified. Lock ‘em up and throw away the key. Or, at least, ban those who do such things from taking part in the capital markets. Because the actions alleged -- we must always remember the “alleged” part -- undermine the effectiveness of those capital markets at their necessary job.
Reading between the lines, what is being alleged here is a series of “pump and dumps.” It’s easier to move a share price in something “illiquid.” That just means how many people are buying and selling it. A liquid stock has many people swapping shares around, so any amount of artificial buying will only have a modest effect upon the price. But something illiquid, a small change in the balance between buyers and sellers, can change the market price considerably.
So, to make money, identify a mildly illiquid company. Buy, secretly and without moving the price too much, a good number of shares. Then, publicly and with much fanfare, buy more shares. Perhaps make up a rumour that the tax situation will change, or there will be a big order, or planning permission will be granted -- something that will increase the value if it happens. Then watch as people buy on the rumour, also your public buying will have pushed the price up so people will follow that too.
Then, when that pumping up of the share price has been achieved you dump that original shareholding at this new and higher price. A pump and dump has been done and you get to count your profits.
This is also highly illegal in most financial markets around the world. At two levels. Really bad cases will be prosecuted for fraud under the criminal law. But that's a hard thing to prove – how really to distinguish between someone who bought because they thought it would go up, someone who bought to make it go up? So there's a second level of punishment, that by the market authorities. It's called “being warned off” or, more simply, being banned from the financial markets.
This only has to meet a lower standard of proof which is why it is so effective. Simply a declaration that we think you've been a naughty boy and we'd prefer not to have you around here. And it does indeed work.
Pump and dumps don't happen in large stock markets. They do happen in the less well regulated junior parts of them -- so, not on NASDAQ or the NYSE in the US but on the OTC (over the counter) markets. They do sometimes happen in bond markets which are very much less regulated than stock markets.
Perhaps we can put this the other way around, in that stock markets are like criminal ones in the sense that they only work if everyone within them is being honest with each other. So, when we find people manipulating financial markets we kick ‘em out to die in a ditch. Because the integrity of the system is so important that we've got to ensure everyone in it is acting honestly.
Tim Worstall is a senior fellow at the Adam Smith Institute in London
