Price Manipulation in Indonesian Capital Market: Empirical Analysis on Stockbroker’s Behavior and Interaction Pattern between Domestic Investors and Foreign Investors

Abstract

Price manipulation in stock market transaction is an important issue when developing investor  conidence  and  market  integrity  is  a  priority.  Price  manipulation  is  prevalent  in emerging  markets,  which  still  have  institutional  problems  and  lack  regulations.  A  stock market  as  a  mutual  company  has  an  institutional  problem  when  a  stock  broker  instead  of being an intermediary, behaves like a dealer and a principal for some stocks. A stock broker has strong incentives to give a signal to public investors about price of some stocks in order to get an unfair proit. A usual pattern of manipulation done by stock broker is a pump and dump manipulation. Artiicial price increase was made by manipulators through buying and selling activities among themselves until tend chaser and naive investors jump to this game. When stock price is at the highest level, manipulators start selling their stock. This research measured  and  identiied  behavior  pattern  of  stock  brokers  in  Indonesian  Stock  Market, concerning  their  contribution  to  price  manipulation  existence.  Because  of  the  important  role  played by foreign investors in Indonesian stock market, this research would also identify interaction  pattern  between  foreign  and  domestic  investors.  Empirical  researches  showed that  foreign investors  were underperformed domestic investors in Indonesian stock market (Dvorak, 2005, and Agarwal et al. 2009). In spite of their superior experience and inancial support  compared  to  domestic  investosr,  foreign  investors  got  lower  return  on  average. Agarwal  et  al.  (2009)  showed  this  phenomenon  occured  because  foreign  investors  were more aggressive than domestic investors. Dvorak (2005) argued that domestic investors had more  access  and  network  to  collect  short  run  information  and  were  able  to  transfer  those information to proitable trading strategy. This research  tested new hypothesis about foreign investors'  underperformance,  that  those  foreign  investors  were  entrapped  in  manipulative mechanism  done  by  domestic  investors  having  short  run  information  through  domestic stockbroker companies. ");} // --> activate javascript