How do manipulators attack an index?
The reasoning of a profit-maximising manipulator leads him to focus on stocks which have a high weight in the index but have poor liquidity. This would obtain the maximum change in the index per unit of capital deployed into manipulation. To cite an example, if a manipulator has Rs.1 million of capital, it makes no sense for him to spend that on trying to affect the price of State Bank (a highly liquid stock, where a purchase of Rs.500 million would typically move the price by less than 1%). Instead, that money is much better spend on Hindustan Lever (a less liquid stock). The best stocks to target would be those where liquidity is low and weight in the index is high. A manipulator would choose those index stocks where the number w * i is the highest, where w = weight of the security in the in index (in percent), and i = impact cost (in percent). If impact cost is hard to measure, then stocks with large values of w=s would be used, where s = bid-ask spread (in percent). These formulas
