The Pakistan stock market set another record in the later part of the previous week when the traded volume crossed a billion shares in a day.

It had last seen a billion shares change hands in a single day as far back as 2005. Many people think it will send a positive signal to the government that the stock market — the barometer of the economy — was putting up a wonderful performance. Others, however, believe that there is more to it than meets the eye.

In 2005 when the traded volume crossed a billion shares, the three stocks that were on top of the volume leaders’ list included Oil and Gas Development Company (OGDC), Pakistan Telecommuni­­cation Ltd (PTCL) and National Bank of Pakistan (NBP). They accounted for 42pc of the aggregate volume.

In contrast, the stocks that churned out the highest volumes last Wednesday were WorldCall Telecom (370 million shares) and K-Electric (107m shares). WorldCall, as everyone knows in the market, is worthless with its stock priced at a pittance Rs1.68 against the face value of Rs10 a share. K-Electric is also tagged at the discounted price of Rs4.54. Half a dozen other stocks that contribute more than 55pc of the billion-share volume are also penny/junk stocks. Non-performing, non-remunerative and, where financial statements are available, saddled with unsurmountable sums in debts and deficits.

Speculation may be the spice of trading but not so in garbage stocks

Incidentally, a few companies whose stocks recorded a huge turnover have long been dead and buried. So are the investors purchasing those shares in huge numbers in the hope of brighter future prospects. Scarcely so.

Many stock strategists believe that a pump-and-dump scheme is in full swing. WtopNews defines pump-and-dump as “the devious practice of insiders promoting a stock — manipulating its price higher through short-term hype (pump) — and then selling out themselves at the top (dump), leaving those who bought on the ascent with huge losses as the stock plummets”.

It goes on to say: “Sudden increase in volume: most penny stocks are pretty illiquid. So if there’s been no trading in this stock in days, weeks or months, but suddenly there’re tens of thousands of shares trading hands, perhaps for multiple days in a row, this is a red flag.”

The heavy turnover provides lavish sums in commissions to stockbrokers. A market player said the Securities and Exchange Commission of Pakistan (SECP) had released regulations that determine the commissions in order to stem cut-throat competition among the broker fraternity. According to the rules, the minimum commission has been fixed at three paisa per share or 1.5pc of the stock value, whichever is higher. The maximum is fixed at 2.5pc of the value of the security. At the minimum of three paisa a share, the commission on a billion shares will be Rs30m a day, distributable among the 100 or so more active members.

But if the pump-and-dump scheme is the norm of daily trading at the market, it will be a grievous fault and the apex regulator in Islamabad should not be sitting idly watching the show.

Ali Nadeem, head of sales at First National Securities, does not see foul play. “Speculation is the spice of trading,” he observes. He believes that there is ample liquidity in the market, nominal leverage, and healthy participation from foreign investors, individuals, financial institutions and insurance companies that ensure that heavy volumes can be absorbed.

He said that unlike in the last stock market crisis, there are no bars on exit or entry of investors. The amounts in the futures (open positions) margin trading system and margin financing together stand at around Rs40-45bn. It is manageable against the leverage financing or badla that mounted to over Rs85bn and triggered the previous stock market crash. The big volumes also trigger volatility in the market that takes investors on a rollercoaster ride. However, volatility in some measure is also considered by most analysts as healthy for the market since it helps in price discovery.

Yet those who see the current trend argue that speculation is good but not in garbage stocks. They worry that the benefits of the market’s spectacular rise of 70pc from its nadir at 27,229 points on March 25, 2020 to the 33-month high of 46,900 points may be lost in the ongoing pump-and-dump in penny stocks to generate volumes as well as unexplained and unfathomable price increases in certain stocks mainly in the technology sector.

TRG Ltd was languishing at Rs12.87 on March 25. It is now trading at Rs118, up nine times in under a year. Netsol Technologies that no one was picking up at Rs27.16 is now doing brisk business at the price of Rs228, up eight times. Neither company has a strong balance sheet or huge earnings growth. Nor do they disburse dividends. People have reason to believe that bubbles have been formed and their burst will spell disaster.

Their theory of a “controlled market” is lent credence from the almost complete lack of activity in the two index-heavy sectors bearing dozens of blue-chips. The banking sector sees no rally despite positive changes in fundamentals and the exploration and production sector where stocks are languishing regardless of the international oil price that has climbed to $65 a barrel.

Published in Dawn, The Business and Finance Weekly, February 15th, 2021