Tito Summa Siahaan & Francezka Nangoy – Shares of Mustika Ratu, a cosmetic and herbal medicine maker, were heavily traded in February, which was unusual for the company given there was no news to support the price movement.
The stock rose 25 percent in the two days to Feb. 15 to Rp 680, its highest level in 14 months. On the second day's trade, 177 million shares changed hands, an almost 50-fold increase on the 12-month daily average turnover, according to Bloomberg data.
Two days later, Mustika Ratu dropped 13 percent, becoming the latest company caught in alleged price manipulation, or stock kiting, according to brokers.
Known in Indonesia as goreng saham (frying up shares), kiting involves investors manipulating the stock price of a publicly traded company to their advantage. Such action is illegal under Indonesia Stock Exchange (IDX) rules, but cases that come to public view are rare and often difficult to prosecute.
As the market struggles to reach the record high of almost eight months ago, small investors are looking to take advantage of gains. Large fluctuations in the market highlight the vulnerability of shares in companies with small market capitalization and show how blocks of shares held by small individual investors can dictate the stock price without any regards to the fundamentals of the company.
The LQ45 – a basket of 45 of the most valuable companies – accounts for 70 percent of the $380 billion in market value of all stocks on the exchange, but about 400 publicly traded companies make up the remaining 30 percent.
Manipulation schemes are common in Indonesia, said a broker who works in the IDX building and asked not to be named. "It happens almost every day," he said, pointing out that last month, shares of Mustika Ratu "were being 'goreng-ed.'"
Executives at Mustika Ratu, which listed in 1995 and has a market value of Rp 243 billion ($26 million), did not respond to repeated requests for comment.
In order for the scheme to succeed, an investor needs to hold more than half of the companies' shares being traded in the market, the anonymous broker said, and "that's why companies with small stock circulation are very prone to the scheme."
The investor, usually a big player in the market, spreads the stock ownership across different brokerages to avoid suspicion, and those investments are then split by a broker into several different lots, the broker said.
"They use one broker to buy and another to sell, then perform the split methods to make the trading look active. This is the common method from people looking for a quick profit from the scheme," he said.
The scheme typically targets unsuspecting individuals or inexperienced brokers. "Seasoned traders are rarely being caught up in the scheme, as it can be easily identified from the transaction information," another broker said.
Other methods of the scheme involve companies wanting to make their stocks look active on the trading floor.
"The thing with goreng saham is that there are no rules or guidance whatsoever as to what affects their decision other than capital gain," said Betrand Raynaldi, head researcher at eTrading Securities in Jakarta.
"The brain might be the individual, but sometimes it acts on the interest of an organization, with an organization's money. Sometimes it's related closely to the listed company itself. There is no pattern in goreng saham investing."
The World Bank, in its report on corporate governance in Indonesia in 2010, said that as in many countries, detecting and enforcing violations of illegal insider trading rules has proven to be a significant challenge.
It cited three cases in which the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) had charged company insiders or market intermediaries with insider trading or market manipulation.
The report stated that market participants agree the agency is making an effort to bring cases but also feel that insider trading and market manipulation continue.
Prosecution of such cases is rare. One broker said that in his decade of experience he knew of one colleague who had been caught for illegal trading and punished with a suspension.
"I've seen people being interrogated for suspicion, but no punishment, as they usually come up with solid argument like insider information on the stock's future performance," the broker said.
In some cases, all that regulators can do is temporarily suspend a stock from being traded and issue a public notice inquiring about the unusual price movement to company officials.
Myoh Technology had its shares suspended from trading for thee weeks from Dec. 21 after the stock more than tripled in a month following a share sale as it was switching its main business to coal mining from information technology.
Small investors such as Riza Nasution, an employee at a state-owned bank, piggyback on such unusual price movements to gain an advantage.
Some stocks that he tends to trade because of large gains and losses are Bakrie Group-affiliated stocks including Bumi Resources and Energi Mega Persada.
"Bakrie stocks are interesting because a lot of people trade their stocks and so they are liquid. You can buy in and sell out anytime," said Riza, who first started trading in 2007.
"I don't have time to go through detailed analysis on stocks to have enough information for long-term investment."
As for goreng saham, he says he has stayed clear of becoming involved. "Well, I know about those groups, but I don't join and I don't think I'd like to."
Officials at the exchange did not respond to inquiries seeking comment.