How would letting shares move freely up and down help balance the market, asks Sherine Abdel-Razek Cartela in Arabic, or cartel in English is the name of the game. Shareholders in some small companies -- with no significance in their sectors and with a negligible daily turnover -- join forces, forming a cartel and start placing buying orders on shares they don't own. The escalating demand pushes the share to its daily price limit of five per cent at which the transactions on a company are suspended. The practice is repeated for many days during which the share price unjustifiably surges and thus stirs interest among small individual investors who lack the needed background to understand the game. The latter enter the market to buy more and more shares in companies with no growth potential, pouring capital gains into the laps of the cartel members. The cartels gamble on the fact that at the beginning of the game they will not receive selling orders as no one is interested in the company yet. "They bet on the psychological factor: the market dominated by retailers is driven by two main factors -- greed for more money and hope that the upward trend will continue. This is what those cartels feed on, hope and greed," said Mustafa Saad, chief equity trader at HC Securities. And even if the cartel received selling orders at the beginning of the game, their loss is not significant as shares of those small caps are usually not expensive and the loss is marginal compared to the gains they might end up with. However, the game is different now. Prior to 14 June, only 55 companies of those listed in the Cairo and Alexandria Stock Exchange (CASE) were traded with no price limits on their movements. The rest of the companies had a range of five per cent up and down to move in, i.e., the CASE administration suspends transaction on those shares if they lose or gain more than five per cent on their price for fear that the increase is due to speculation or insider trading. A decision issued by CASE's supervisory body, the Capital Market Authority (CMA), added 45 new companies to the freely moving category which now includes 100 companies. The free movement of shares is not absolute as those 100 shares can move freely till a gain or loss of 10 per cent is made. At this point CASE suspends transactions for half an hour to calm the market, before resuming activity on the share. If the share then reaches a price that is 20 per cent higher than the opening price, transactions on the company are stopped till the end of the trading session. The outgoing head of the CMA, Hani Sarieddin said the move aims at limiting the risks of speculatory practices as companies with price limits face pressures affecting their price in a way that contradicts the main idea behind introducing those price limits. The move was praised by market observers who see it as an end to the cartels game. "Such speculators will be taking a very high risk if they try to repeat that game now that the ceiling is 20 per cent rather than five per cent," said a trader at one of Egypt's leading investment banks. "To reach the 20 per cent ceiling by placing buying orders, the cartel takes the risk of buying shares at levels which are 20 per cent higher than their fair value, an expensive price to pay." Both traders recall many cases of such practices where investors found themselves stuck with shares that they bought at levels equivalent to 100 times what they were really worth. Names like Extracted Oils Company and Arab Shipping and Stevedoring Company (ASSC) witnessed triple digit increases, reaching 700 per cent in the case of ASSC in less than three months. However the most famous incident was that of where the CMA suspended the transactions on the company for one month after the company prices jumped from LE9 to LE19 in three weeks for no significant reason. "We knew that it was a cartel of shareholders owning four per cent of the company. The share prices slid to LE10 after the CMA's investigation," said the anonymous trader. While neither CASE nor the CMA reveals the criteria according to which the companies are chosen, market observers say it is a combination of factors: the percentage of the free floated stake in the company plus the daily turnover and market capitalisation. CASE revises the list of companies traded without price limits every three months according to trading criteria. The CMA took the decision following a memo from CASE administration. Maged Shawqi, the Bourse chairman, has long been calling for lifting those limits saying that such price limits should be the exception not the rule as it contradicts the free movement of the market and international practices. HC's Saad agrees with Shawqi to some extent: "Only regional emerging markets have such limits. You will find price limits in all the neighbouring markets even in Saudi Arabia whose market is 20 times as big as ours. Meanwhile developed markets such as the New York and London Stock exchanges have a better safeguard -- transparency." Though market observers believe that soon all traded shares will be moving with no price limits, this may be the time to pause in this rush of new measures. Considering the number of insider trading and managerial malpractice cases last year alone it is clear that Egypt still lacks the safeguard of transparency. Furthermore, the new decision should be just the first of many moves aimed at increasing the efficiency of the market.
