Micro-Foundation Investigation of Price Manipulation in Indonesian Capital Market

ABSTRACT

An analysis of all intraday trades in the Jakarta Stock Exchange during 2003–2004 indicates that more than half of them are “manipulated” by principal stockbrokers. Consequently, they can earn between 59% and 92% more annually than intermediary stockbrokers, which depend heavily on their investment patterns as well as firm’s characteristics. Specifically, our regression results suggest that with increases in their degree of principalness (PRIN), stockbrokers with a greater trade imbalance earn more at the expense of outside investors, even though this effect diminishes as PRIN increases. Moreover, firms that suffer the most from stockbrokers’ inappropriate behavior have large market capitalization or high stock liquidity.

KEY WORDS:

• emerging market
• market governance
• price manipulation
• stockbroker’s behavior
• trade-based manipulation

JEL CODES:

• G14
• G15
• G24

Acknowledgments

All views expressed herein are solely those of the authors and do not necessarily reflect those of the Indonesia Capital Market. The authors thank the Editor, Ali Kutan, and three anonymous referees for their insightful comments, as well as participants of the 4th Sebelas Maret International Conference on Business, Economics, and Social Sciences for the valuable discussion. The authors are grateful to Shunsuke Mori, Kiyoshi Dowaki, Sudarso Kaderi Wiryono, Yunieta Anny Naninggolan, and Irwan Trinugroho for their help and for the invaluable discussions. All errors remain our responsibility.

Notes

1. The number of active PLCs and stockbrokers in Khwaja and Mian (2005), respectively, is 147 and 648, while Imisiker, Ozcan, and Tas (2015) included 269 active PLCs and 1,172 stockbrokers. Hence, the ratio between the number of active PLCs and stockbrokers in both publications is about 23%. With 345 active PLCs and 174 stockbrokers in our dataset, the ratio for this study is about 50%.

2. A “trade” at the stockbroker*PLC*daily level is the daily, aggregate trading volume of a stockbroker who performs trading activities on a particular PLC. This daily trading volume is further separated into buying and selling categories.

3. For a complete illustration of each type of trade, see Table 1 in Khwaja and Mian (2005, 216).

4. The above assumption does not need to be entirely true. It can be relaxed by assuming that all types of suspicious trades are correlated with principal stockbrokers (Khwaja and Mian 2005).

5. For robustness, we also find similar characteristics between the first and second subsamples, either by using total trading volume or total trading frequency.

6. This likelihood indicates PRIN for a particular PLC over our sample period, so we need to collapse the date element of previous daily aggregated level.

7. For this reason, we add a PLC-level fixed effect in our regression analysis to ensure that we only compare stockbrokers who are actively trading within a particular PLC.

8. We use time-weighted, average, capital investment for the weighing variable.

9. Any observation that does not meet this criterion are labeled as “0.”

10. We use three proxies to measure a firm’s stock liquidity because no consensus exists on this issue. According to many market microstructure researchers, the simplest measurement, average trading frequency, which was used to distinguish active and inactive stocks by Chang et al. (2008), has a limited capacity to capture the desired information.

11. Free-floating, outstanding shares are calculated by subtracting the number of shares issued by a particular PLC from that of restricted shares held by company insiders, such as a company’s top management.

12. This is similar to a description by Comerton-Forde and Rydge (2006, 5) regarding market concentration in 10 Asia-Pacific stock markets. According to these authors, the two most concentrated exchanges in the Asia-Pacific area are located in Australia and Jakarta.

Additional information

Funding

This work was supported in part by the Japan Society for the Promotion of Science [Grant-in-Aid for Scientific Research (B)/15H02975].