KARACHI, Aug 6: That almost sounds like the story of a laundry. But the report of the Task Force on stock market crisis of March 2005 uses those words which a student of finance and capital market would never be able to find in text books. These are ‘home-coined’. The Securities and Exchange Commission of Pakistan (SECP) has already issued notices to 10 top brokers allegedly involved in ‘wash sales’. But who are the ‘dhobi’ brokers?

The report notes that any investigation of the KSE is handicapped by a number of structural flaws that hide the identity of persons undertaking transactions. This has been facilitated by the brokers dealing through other brokers with the clear intention of covering their tracks as symbolized by the existence of ‘dhobi’ brokers. In addition, the brokers do not declare whether their trade represents a transaction on their own account or on behalf of a client. The report states: “The other factors that have plagued this investigation were potential insider trading and the liberal existence of Benami and group accounts. These factors make the KSE an opaque market and, consequently, a haven for manipulators.”

At another place, the report mentions that risks also lie in the opaque domain of the exchanges where those transacting can design manipulations behind the screens of group accounts, Benami accounts and ‘dhobi’ brokers.

In point 26, the report mentions the ability of brokers to undertake excessive day trading and ‘wash sales’. That, the report says, is possible because of policy, procedurals and systemic flaws. “The analysis of stock market data helped identify a number of potential cases of market abuse where players had undertaken ‘wash trades’ either for the same client or a series of common clients across brokers to ‘pump’ the market. Analysis shows that the brokers and their clients largely dealt with each other in groups or sub-groups at both broker and client level,” says the report.

It points out that presently there are no limits on the level of day trading by a broker, due mainly to the lack of pre-trade verification systems and other capital adequacy measures. This weakness, coupled with an almost out of control use of ‘wash trades’ either directly by a broker’s client or through the use of two or more brokerages in violation of the rules, facilitated market manipulation. The Task Force strongly urges the SECP to undertake a thorough forensic investigation and possible prosecution of suspected ‘wash trades’ and other manipulative practices that have been identified in this report.

Commenting on the report, every market guru puts forward his own list of what he sees as its shortcomings. But that does not rob the Task Force of the credit that is its due in coming up with a report prepared in line with its “terms of reference”.

The public criticism is perhaps an extension of those made by the National Assembly Committee on Finance during its public hearing on Wednesday. The NA Standing Committee had rejected the report and demanded a fresh report from SECP Chairman Dr Tariq Hassan to be presented sometimes around August 15. The members of the NA committee have demanded that people who profited from the March crisis be identified and named.

Given the time that the original report of the Task Force has taken in coming into public view, a 15-day notice for a fresh report looks like an insurmountable task. The Task Force was constituted on April 12, within a month of the March 2005 stock market debacle. The report is dated June 2005, but it was not released until August 3 -— at least two months after it was submitted to the SECP. Was that the violation of the Task Force, which in its covering letter to the SECP chief, had stated: “We strongly recommend that this report be made public immediately in the interest of greater transparency in the government and public accountability.”

But the current report is not the only one on the stock market crisis. Veterans recollect that the first such report was prepared as far back as in 1958, which was later published in the official gazette in 1960. The next was the well-known ‘Etrat Rizvi’ report. It investigated the year 2000 market crash. That report was submitted to the then chairman, SECP, Khalid Mirza, on August 21, 2000, who made it public the following day.

The current Task Force report does name the largest ‘net buyers’ and largest ‘net sellers’, but some people think that to be hardly of much significance.

A person who knows the market like the back of his hand contends that there is nothing in the report that was not already known by the market pundits. He even disputes the importance of ‘wash sales’. In simple terms, ‘wash sales’ represent trading by the same broker in the same share at the same price, both as a buyer and a seller. The purpose is to artificially generate activity in the market so as to attract investors.

The expert points out that the Appendix disclosing ‘wash sales’ shows less than a dozen trades of around 25,000 shares and others even less. “Where the aggregate volume in major scrips was in the vicinity of 70-80 million shares a day? How could such insignificant number of ‘wash trades’ impact the overall activity,” he asks. “Besides, since a 90 per cent of all of the volume in our stock markets is intra-day or ‘badla’, exact figure of ‘wash trades’ can not even be determined,” says the market man.

On top of everything else comes the missing daily pre-trade order date of the exchange and the lack of pre-trade verification system. It was not the regular trade itself, but the ‘pre-trade’ that put up ‘lower locks’ on all major scrips and blocked the exit of small investors, which caused them enormous losses. In the absence of that vital information, the report can be acknowledged as an excellent chronology of events, but essentially an exercise in futility.