Market Manipulation in NEPSE: A Clear Perspective for Investors

A Brief Introduction to the Stock Market and Nepal Stock Exchange:

A stock market is a financial market where various companies list their shares and bonds to be bought or sold by various institutions and people trading in the market. By buying the shares of a company, you secure a small ownership in it by believing in the growth of the respective company in coming future.  Companies list their shares to generate funds for their company by selling shares, whereas the investors generate profit by investing in the shares and dividends of various listings.

Nepal Stock Exchange is the only stock exchange listed in Nepal, founded in 1993. NEPSE provides a strong background for all the national companies to be listed under it to generate capital from investors, and provides a centralized platform for investors to earn money by investing in their shares. NEPSE has provided a platform for investors to invest in shares, government bonds, mutual funds, and other securities. Despite its importance, NEPSE has continuously faced challenges common in emerging markets, such as limited investor participation, low market diversification, and occasional price manipulation. Strengthening NEPSE is vital for Nepal's long-term economic development and investor confidence.

Let's dive into what market manipulation means.

You want to buy a pencil, you go to the market and see two stationery stores, and you see one with many customers, whereas the other has no customers. Seeing the volume of customers in the first one, you just go with the trend and buy your pencil from the first store. But what if mass was manipulated and was brought by the owner of the stationery by paying them some amount of money so that he could play with the mentality of people near them to attract customers.

Exactly, this is how the market manipulation works. In clear terms, market manipulation means misleading people with stocks and assets listed in the market by playing with the stock's trading volume or manipulating the stock's prices to fake their demand and supply. It's considered an illegal and unethical practice of interfering with the fair operations of the financial markets. Those who engage in manipulation—often called "operators"—do so to benefit financially, usually at the expense of regular investors.

These activities include faking news about certain companies, mainly focusing on news that may create fake hype about the company's rise of fake their economic downfall. It also involves the mass buying of stocks to show fake demand for orders by having large-scale buy/sell in the markets. These activities create an illusion in the market and mislead investors, which may damage their confidence in the market. Especially, market manipulation in stock exchanges like NEPSE is very easy due to many aspects that will be discussed further.

How does NEPSE function?

The Nepal Stock Exchange (NEPSE) acts as a regulated marketplace where securities such as bonds, shares are traded. Investors buy and sell shares of publicly listed companies and earn money by risking it in perfect market situations; all these buying and selling are managed by licensed brokers. The prices of the shares in the market fluctuate based on demand and supply, company performance, market sentiment, and economic factors. NEPSE also tracks overall market performance through its index, which indicates the collective movement of listed stocks and their securities.

Challenges in the NEPSE market

We all know that NEPSE is one of the main factors that affect the Nepali financial system, even though NEPSE has been facing structural and operational challenges:

• Low participation of investors: It is seen that NEPSE is a small market in comparison with the global markets due to the listing of very less companies inside the stock exchange. NEPSE is mainly controlled by some of the companies with low liquidity, giving less floor for speculative trading. Due to a small number of companies in the stock exchange, it is more suitable for long-term investments, which automatically affects investors' interest in the Nepali stock exchange.
• Concentration Risk: NEPSE is concentrated in a few sectors, mainly banking and finance. Due to a lack of diversification, investors have very few options to invest in stocks, and these sectors can be easily manipulated by various factors, risking the money of many. The absence of representation from key industries like tech, manufacturing, and services limits investment options and weakens market balance.
• Weak Regulatory Enforcement: While the Securities Board of Nepal (SEBON) provides oversight, enforcement of rules around insider trading and price manipulation remains inadequate, clearly providing a floor for market manipulation. This allows unethical actors to exploit the system, creating an imbalance in the trust of investors.
• Imbalance of Information: NEPSE strongly lacks the balance between information sharing and investor emotions. Pieces of information regarding NEPSE and its listed companies are mainly biased, opening a floor for market manipulation. This is how operators are taking a strong position in the market, opening an illegal mentality.

Impact on Investors and the Economy

Due to these many challenges, the market is always open to being manipulated, providing a floor for operators to handle the market in their benefit. Investors risking their shares are always at a high risk of losing their money if they don't choose a better platform for information and work accordingly. These problems, which negatively affect the confidence of investors and make them lose all trust in stock exchanges, result in the downfall of the stock exchange. Also, the financial sectors of Nepal should work on raising various companies and sectors inside the country, providing vast platforms for investors to trade. These companies handling and manipulating the market provide a small liquidity for trading, where investors lose interest in trading inside the Nepal Stock Exchange. These manipulations in the market work to influence prices, widening economic inequality for investors, resulting in a loss of investors while manipulators generate profits. 

The way forward

To ensure NEPSE grows into a more stable, transparent, and investor-friendly market, a multi-pronged approach is essential:

• Strengthened rules and regulations: Regulatory bodies like SEBON in Nepal have to strictly work against these unethical and illegal tasks being operated in the stock exchanges. By introducing various technologies and infrastructures, updated legal frameworks, and skilled manpower to detect and penalize market manipulation. Every day, strict audits, stricter penalties, and improved surveillance systems can help deter unethical practices.
• Promote Investor Education: A large proportion of NEPSE participants aren’t aware of how these manipulation works in the market; at the basic levels, they follow fake manipulated information and news in the market and go with the flow. This information circulating in the market mainly crashes or influences the price, boosting the confidence of investors to invest and later bear losses. Organizing awareness campaigns, workshops, and online courses by various famous and actual stock exchange educators can help investors make informed decisions, reducing their vulnerability to manipulation or misinformation.
• Improve Market Transparency: Listed companies should share their information and data with the public to have a better perspective in the market and invest with confidence. Transparency in the data would strongly create confidence for people in the market to invest in the prices and have proper returns.
• Encourage Market Diversification: Diversified markets provide more liquidity and opportunities for investors to explore and invest in the market. Less diversified markets mean less concentration of companies for investment and more long-term investment in the market. Financial sectors in Nepal should work on investing and upscaling other sectors besides finance and banking to create opportunities for investors to have speculative trading using various opportunities to earn.

Conclusion

While the Nepal Stock Exchange plays a vital role in the country's financial ecosystem, it should be properly managed as its vulnerability to manipulation, inconsistent performance, lack of transparency, and limited participation hinders its true potential. Addressing these challenges is not just the responsibility of regulatory bodies, but of all stakeholders, Disseminators, communicators, investors, companies, and policymakers alike.

By enforcing stricter regulations, promoting financial literacy, developing technological infrastructures, and solving the less diversified markets, NEPSE can evolve into a more trustworthy and dynamic exchange competing with several giants of stock exchanges.

All the investors of the stock markets should also focus on consuming information from proper and efficient news-sharing groups, to be less affected by the operator's mind games. If all the bodies involved in the stock exchange play smart roles, then it is sure that NEPSE would also turn into a beast stock exchange, restoring confidence, ensuring equity, and improving the financial future of the nation.

Article By: Divyam Jha