EARLY last week, the Securities and Exchange Commission of Pakistan (SECP) ordered an investigation into the leakage of trading information at the Pakistan Stock Exchange (PSX). The apex regulator thundered that it would investigate, identify and curb the source of this unlawful practice.

The SECP also talked about taking “necessary corrective and punitive actions”.

While this should have scared the perpetrators to death, no one gave more than half a glance to the statement. Anecdotal evidence suggests that in the two trading days that followed, the ‘calendar’ was still available.

The calendar

Leaked sensitive trading information is code-named calendar, which provides a glance into ‘buy-sell’ orders of big investors and is readily available at the stock exchange for a price. It enables buyers to benefit from information and get away with ‘front running’ and ‘insider trading’.

In principle, the stock market operates on the basis of ‘undisclosed trading’, which requires complete secrecy of the trading positions of every investor. But for ages, this regulation has been violated.

At the first general meeting of PSX shareholders held on Oct 24, some senior members strongly protested the ‘data leakage’ and demanded that it be plugged.

The majority stakeholders — the consortium of Chinese investors who are now entitled to manage the bourse — sat dumbfounded as the acting managing director tried to pacify the crowd and explained that steps were being taken to ensure secrecy and security of live market data.

Inquiries and analysis

Last week, the SECP also pledged to form a committee to investigate market abuse. But a senior broker, who did not want to be named, said that several such inquiries have been conducted over the years, with the bourse footing a bill of Rs20 million or more. But the malady persists.

Most knowledgeable sources conceded that, all in all, it was a complex matter where it was indeed difficult to pinpoint the perpetrators. A market participant said that those who know of leaked sensitive trading information have been blatantly selling the calendar.

The SECP talked about taking “necessary corrective and punitive actions” to curb the illegal practice, but no one gave the statement more than half a glance

Several years before the stock market crisis of 2008, two whistle-blowers accused senior staff members of the bourse of illegally peeping into sensitive real-time trading data and accessing emails. A reputed consultancy firm, Sidat Hyder Morshed Associates, was hired to conduct forensic analysis of the extent of the problem.

The 2014 report has remained a well-guarded secret, but sources familiar with its contents say it discovered that some employees of the exchange, including the then managing director, had access to individual unique identification numbers (UIN) — the account number allocated to each investor — and they could watch ‘buy and sell’ orders.

Some senior staff members in the IT department, suspected of involvement in data leakage, were booted out. But nothing changed.

The difficulty lies in pinpointing perpetrators. While the live data is available to some staff members of the PSX, the Central Depository Company and the National Clearing Company of Pakistan Ltd, no one can be held guilty without proof.

Inquiries by this writer revealed that the whole process takes place in a thoroughly planned manner, where no trail is left which could lead to the perpetrators.

The most commonly used medium to pass the calendar is WhatsApp. From a private number, recognised only by the potential buyer, the seller offers the calendar ‘live’ as well as in the evening, mainly between 5pm to 7pm, for an agreed price.

Major sufferers

The mutual funds industry — with a massive Rs618 billion under management by 19 asset management companies in a total of 218 funds (half of those being equity funds) — now commands the power to set the market direction.

In the prevalent competitive environment where the aim of every fund manager is to outperform peers, mutual funds are a sitting duck for brokers who target them for a major portion of their business.

“The funds were earlier offered the calendar as an incentive by brokers to seek big business,” he said. “All of that has now changed. The calendar is now used as a threat of disclosure of the fund’s position if it did not provide business to the broker.”

It would be unfair to consider the whole broker fraternity as cheats and blackmailers, but such elements do exist.

The other major casualty of data leakage is sometimes another broker or a high-net-worth individual whose buy or sell position is disclosed.

“I place an order for 100,000 shares of a company to be bought in several lots at dips during the day,” says one indignant investor. “Just as a first or second lot is bought, my position gets leaked and, before I know, an unknown number of investors leap for that stock which tosses it to its upper circuit [the maximum permitted rise or fall of five per cent of the value in a day].”

He lamented that he can then buy no more during the day and his initiative based on research is unjustifiable, wrested by those who have access to the trading data.

“The more things change the more they remain the same.” When the19th-century French novelist Jean-Baptiste Alphonse Karr uttered his famed quote, he could scarcely have known that it was the PSX he was talking about.

The decades-old reforms initiatives — from demutualising the exchange, integrating the three exchanges of the country, selling majority shares and handing over the bourse’s management to the Chinese ‘anchor investors’ and leading finally to the listing of the PSX on itself — have done little to eradicate the power of brokers and purge the market of manipulation and abuses.

Published in Dawn, The Business and Finance Weekly, November 27th, 2017