The PSX Racket: How Volatility Gets Amplified

 

This week has seen the KSE100 index act like a seesaw both intraday and day-to-day. Over the past few days, news headlines have been plastered with how the ‘bulls’ or ‘bears’ have taken over the Pakistan Stock Exchange (PSX). But why has there been so much volatility, particularly this week?

When someone would ask JP Morgan (the man, not the bank) what the stock market would do, he would say, “I can tell you exactly what it will do for years to come. It will fluctuate”. And that very well stands true for any stock market. But this statement is even more true when uncertainty is pervasive.

Currently, Pakistan is going through a nervy phase. The National Assembly has been dissolved and the caretaker government is due to takeover. However, the Caretaker Prime Minister has not been appointed yet. Moreover, there is huge unclarity over how long the caretaker setup will last and what their mandate would be.

All this had led to a lack of confidence among investors. And when there’s a lack of confidence or an abundance of confusion, markets tend to work like a gambling racket. Just like Pakistan Men’s Cricket Team, the stock market too is ‘one minute down, next minute up’.

Unfortunately, this lack of confidence has been taken advantage of. Certain market participants (ahem, brokers, ahem) pumped and dumped certain pieces of news through their network of WhatsApp groups. For instance, there has been a lot of speculation over the resolution of gas circular debt. These rumors have been vigorously pumped as the truth on some days and a lie on other days. Resultantly, index-heavy oil and gas SOEs like PSO, OGDC, PPL and SNGP have seen heightened volatility.

On the 8^th of August, both oil & gas saw heavy selling as the same market participants pushed forth the view that the caretaker government cannot clear circular debt – which is false. After amendment of the Election Act 2017, caretaker government is empowered to take policy decisions such as clearance of circular debt.

Similarly, the new refinery policy was pumped positively on one day and seen completely negatively the next day. As a consequence, refinery stocks, too, have been a victim of aggressive news manipulation.

Although, these are specific incidences of what caused the spike in volatility, there are underlying reasons for why PSX is a relatively more volatile market. For example, the high usage of stop-loss orders amplifies volatility. Brokers regularly encourage their clients to put stop-losses at certain price or support levels.

Now, when the market witnesses even a slight bit of selling at market price, a huge number of stop-loss orders get activated and the selling intensifies. This creates a price-to-price feedback loop where lower prices encourage more selling, activating more stop-loss selling and so on.

Furthermore, some players in the market can use information about levels at which stop-loss orders are placed to generate huge selling to make a stock cheaper. This allows them to shadily buy back the shares at a lower price.

On top of all this, PSX investors appear to have a high confidence multiplier. That is, when the market goes up, confidence returns doubly but when the market goes down, confidence tanks harder. This creates an intensified price-to-price feedback where higher share prices produce more buying and vice versa.

And then there are our lovely technical analysts. These analysts come out with their charts and get spooked when their charts start showing them ghosts. And when these analysts share their charts showing wiggly but scary lines, the market gets spooked too because if others believe the index will fall, why shouldn’t they believe it? Sell before others would sell, no?

Finally, we arrive at our famous ‘profit-taking’ behavior. Brokers frequently recommend profit-taking to their clients. As a result, volumes intensify but so does selling pressure which again lands the market in a destructive feedback loop.

So, the magnified volatility is not a consequence of one factor but a multitude of them. But who is the main culprit in causing such volatility? Uneducated investors? A passive SECP? Brokers? Depends on who you are and how you look at the racket.