I have been thinking about quite sometime to write about the Stock Market Operators or Operators. Many of the retail investors might not even be aware of
who they are and what they do.
In the simplest term, they are the most evil entity in the market.They would inflate the share price and once the retail participation increases, they would shun
the stock leaving them stuck making them a long term investor eventually with no future returns.
Ketan Parekh scam of the 2000s was one where the unending supply of money from the banks through pay orders led him to jack up prices of shares. His team soared the share price of Zee telefilm from ₹127 to ₹10,000 and few such stocks within a quick time frame.
Sucheta Dalal, founder of Moneylife has co-authored a book on how this scam unfolded. You can buy the book using this link.
If you think that the market regulator SEBI is tracking all these, then you are grossly mistaken.
An example of SEBIs let go attitude has been to go extremely slow on Gitanjali Gems share manipulation case between the year 2011-12 in which the company’s promoters were involved. Add to that, Nakshatra, a group company got the approval for IPO recently.
Also, has been the case of NSE helping Algo traders make a profit due to their co-location facility.
To identify Operator action, I will give you an instance below:
One way to track their presence is when you see an unusually high volume of orders for any stock.
To make a purchase, they would place the price at the lower circuit price point. Since we are able to see the orders of just the top 5 buy or sell orders, we won’t
be able to see at what price have they placed their order, meaning those orders are not going to execute its just to show that a lot of people are waiting to buy the
share to jack up its price without the operator spending a dime.
Tricky!!! Isn’t it?
I will try to explain using a simple example. For a company with a share price of ₹200 and circuit limit of 10% i.e. on a day the share price can go to a maximum of ₹220 and a minimum of ₹180.
Assuming the usual share volume to be 5 lakhs and when you see the buy volume at say 20/25 lakhs or more, you need to see the actual volume of transactions happening.
Operators will place orders for ₹180 which is the lowest point for the day and which the stock is unlikely to touch.
If the share price is moving around say ₹203-205, you would be able to see only the top 5 bids or asks which are closest to the Current Market Price & hence you would not be able to see the order placed at the lowest price.
So, what you see is that there are a lot of orders placed implying that people are buying but which is actually not so, thus artificially driving prices up.
That can be done similarly to bring down the share price by placing huge sell orders at the permissible highest possible share price.
In such cases, SEBI can bring transparency by allowing us to see all the orders.
Other ways include spreading fake news about the company, sending mass messages to buy or sell a penny stock etc
This is just a few examples of how these people operate. There are hundreds of other ways using which operators can manipulate the prices and they keep developing innovative ways.
Who are these operators->Close knit community of brokers along with promoters and many traders
To safeguard your interest, there are few indicators you need to look out for:
1. Don’t act on the random messages with Buy or Sell stock recommendations
2. Stay away from penny stocks– Companies which have low market capitalization say to the tune of less than 50 cr.
3. Avoid Low liquidity stock– Companies where the liquidity is low. Once the liquidity created by the operator is sucked out from the stock, it is left only with retail investors fighting to exit.
The best to avoid such trap is to
1.Study the company properly
2. Checking the free float– Free float would mean actively traded value share of total market capitalization(Image below with the rounded area)
3. Go through the annual report analyzing the numbers yourself
4. Check the market capitalization and sales of the company
If you would like to dive deep into the workings of market operators, there is a book on american trader ‘Jesse Livermore’
Please comment below if you have any questions or if you would like to share any such examples.