Unchecked Intermediaries: Price Manipulation in an Emerging Stock Market

48 Pages Posted: 14 Dec 2004 Last revised: 8 Mar 2011

See all articles by Atif R. Mian

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Asim Ijaz Khwaja

Harvard University - Harvard Kennedy School (HKS); Center for Research on Pensions and Welfare Policies (CeRP); Bureau for Research and Economic Analysis of Development (BREAD); National Bureau of Economic Research (NBER)

Abstract

How costly is the poor governance of market intermediaries? Using unique trade level data from the stock market in Pakistan, we find that when brokers trade on their own behalf, they earn annual rates of return that are 50-90 percentage points higher than those earned by outside investors. Neither market timing nor liquidity provision by brokers can explain this profitability differential. Instead we find compelling evidence for a specific trade-based pump and dump price manipulation scheme: When prices are low, colluding brokers trade amongst themselves to artificially raise prices and attract positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the ensuing price fall.

Conservative estimates suggest these manipulation rents can account for almost a half of total broker earnings. These large rents may explain why market reforms are hard to implement and emerging equity markets often remain marginal with few outsiders investing and little capital raised.

Suggested Citation

Mian, Atif R. and Khwaja, Asim Ijaz, Unchecked Intermediaries: Price Manipulation in an Emerging Stock Market. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=631722

Atif R. Mian (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Asim Ijaz Khwaja

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-384-7790 (Phone)
617-496-5960 (Fax)

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
Durham, NC 90097
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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