In theory at least, the rise and fall of stock prices should be based on the underlying fundamentals of companies that they represent; which is usually the case.

A high growth, dividend yielding company with bright prospects and run by reputed individuals is able to seize the interest of foreigners, institutional investors and high net worth individuals. Stocks of such companies are also generally fairly priced.

Most multinational companies listed in various sectors of the stock exchange such as food, fast moving consumer goods (FMCG) and pharmaceuticals fall under this category. Since such corporations also have a small free float, it is generally difficult to manipulate their stock prices due to low volumes.

Since the PSX operates on ‘undisclosed trading’, it is an offence to peep into the trading data of another investor; and yet the practice has been rampant

But on any particular day, top volume leaders are usually small to mid-capitalisation stocks; most trading at or around their par value of Rs10.

As most small investors are not known to be skilled in reading a company’s financial statements, they usually dabble in stocks on speculation and rumour. But while speculation is said to be the spice of trading, excessive speculation can endanger an investor with limited wealth.

In the past rumours would circulate through word of mouth, but technology has now made rumour-mongering easier.

Historically only board members of a corporation who were privy to information could spill the beans, but now it is obligatory on listed companies to let all ‘material information’ that can impact stock prices pass through the stock exchanges.

While this has curbed the space available to rumour mongers, anecdotal evidence suggests that false information is now dished out through WhatsApp messages or e-mail. What is significant is that such information appears on corporate letter heads complete, with signatures, making them appear genuine.

Such information mostly relates to decisions which the board of directors never took — distribution of dividends, bonus and right shares — or information relating to setting up new projects, expansions and completion of ongoing plans.

By the time the Exchange confirms the issuance of such a document from the company the damage has already been done. Many market ‘gurus’ are also known to be involved in ‘front-running’.

But the strongest complaints by genuine value investors continue to be regarding ‘leakage of participants’ trading information’.

Since the PSX operates on ‘undisclosed trading’, it is a serious offence to peep into the trading data of another investor; and yet the practice has been rampant.

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. This enables buyers to get away with ‘front running’ and ‘insider trading’.

In the fall of 2017, the Securities and Exchange Commission of Pakistan (SECP) ordered an investigation into the leakage of trading information. The apex regulator at the time thundered that he would investigate, identify and curb the source of this unlawful practice.

A committee was formed to investigate said market abuse. But if a report was ever prepared by the committee, and perpetrators discovered, it never came to light.

A senior broker, who is known to a value investor, chuckled “If I recall correctly this was the fourth committee set up over time to investigate the matter, but except for footing the bills worth around Rs30 million, nothing has been achieved so far.”

Finger pointing suggests those that have access to sensitive real-time trading data, leak information to brokers, who pass them on to their clients through WhatsApp and emails on real-time basis.

For others who are willing to pay a lesser amount, the ‘calendar’ can be bought and sold in the evening. Interestingly, brokers are the beneficiary as well as the casualty of data leakage for the trading position of one broker’s client might get disclosed to another broker or a high net worth individual.

But among the crooked are also honest individual investors who attend Annual General Meetings of companies and discuss and enquire relevant information about the companies from the board.

Being the owners, even if of a negligible part of the company, the directors have to explain the company accounts and discuss the way forward. Others keep abreast with the news and keep an eye on the rise and fall in product prices, expansions and turnovers that would eventually reflect in the company accounts and their stock prices.

Nearly three decades ago, there was no concept of Research at a brokerage house. Few investors understood such basic tools as the price-to-earning ratio and yield. But things took a turn for the better after the first Benazir Bhutto government opened the doors of the stock market for foreign investors.

Stock brokers who were quick to adapt to change opened up their research departments so as to provide market reports to foreign clients.

Not always fully reliable, analyst’s research reports do give an insight into companies and their fundamentals. The apex regulator has recently set out the guidelines for these reports and criminal proceedings have been taken against brokerages that were suspected of churning out misleading information.

Published in Dawn, The Business and Finance Weekly, June 25th, 2018