Unchecked intermediaries: Price manipulation in an emerging stock market

Asim Ijaz Khwaja, Atif Mian

Research output: Contribution to journalArticlepeer-review

156 Scopus citations


How costly is the poor governance of market intermediaries? Using unique trade level data from the stock market in Pakistan, we find that when brokers trade on their own behalf, they earn annual rates of return that are 50-90 percentage points higher than those earned by outside investors. Neither market timing nor liquidity provision by brokers can explain this profitability differential. Instead we find compelling evidence for a specific trade-based "pump and dump"; price manipulation scheme: When prices are low, colluding brokers trade amongst themselves to artificially raise prices and attract positive-feedback traders. Once prices have risen, the former exit leaving the latter to suffer the ensuing price fall. Conservative estimates suggest these manipulation rents can account for almost a half of total broker earnings. These large rents may explain why market reforms are hard to implement and emerging equity markets often remain marginal with few outsiders investing and little capital raised.

Original languageEnglish (US)
Pages (from-to)203-241
Number of pages39
JournalJournal of Financial Economics
Issue number1
StatePublished - Oct 2005
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


  • Bubbles
  • Emerging markets
  • Market governance
  • Momentum trading
  • Price manipulation


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