Insider Trading Watch

From Glen Dyer in today’s Crikey.  I agree.

If you — or ASIC or the ASX — are looking for another example of well-informed trading affecting stock prices ahead of stockmarket announcements, look at yesterday’s 5.3% drop in the price of construction giant, Leighton Holdings to $42.36 ahead of its 2008 profit announcement and a share issue rumoured at $800 million.

Another example is CSLs profit announcement yesterday and its $3.6 billion acquisition of US based company Talecris Biotherapeutics Holdings, which has been preceded by a 10% rise in the CSL share price from last Friday. It now sits at $39, within 90 cents of its all-time high (adjusted for last year’s 3 for 1 share split). The company revealed a solid rise in earnings and an equally upbeat outlook for the coming year.

The rise in the value of the company added more than $1.9 billion to the company’s market cap and enabled the $1.5 billion share issue now being placed with big shareholders to be done at a more attractive price.

And then there’s the questionable trading in ports and rail group Asciano ahead of the equally surprising $2.9 billion offer from TPG and a partner. That trading over about a week pushed the share price up 20% ahead of TPG revealing its offer. The offer was $4.40 a share, the share price pushed through that in pre-trading and then jumped to $4.83 or thereabouts the day it was announced.

The pre-trading in Leighton came despite the market being confident in the company’s forecasts of a 30% rise in profit for the 2008 year. This morning Leighton shares went into what could be a four day trading halt. The details of the issue, its probable size and the brokers involved were in the pages of the AFR this morning — why wasn’t it released to the market as a whole last night?

Why do we see this sort of informed trading? Because market security is not up to scratch bad when someone wants to alter share prices to someone’s benefit. And those doing it, leaking the information to mates, or doing a spot of quiet trading on their own, know they have a better than average chance of avoiding any action.

These are just three of examples of questionable price movements in trading ahead of announcements, or the dumping of shares (or buying) by insiders around announcements. It’s more dangerous to market integrity than the activities of hedge funds and short sellers.

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15 years ago

I agree that insider trading is problematic although although we do have stock watch which is supposed to be all over that sort of thing and I believe they do a good job.

But why this:

Its more dangerous to market integrity than the activities of hedge funds and short sellers.

You actually think that short selling is a problem? Were you saying that in the 20 year bull market when short sellers had their heads handed to them with a result that their shorts caused the market to move artificially higher.

You understand that a large portion of short selling is done through trade pairing which actually provides a great deal of liquidity to the market than it would otherwise. Trade pairing is relative value trading where say you sell a bank and buy a resource company or buy say one bank and sell another with a view that the spread will move profitabilly.

There is absolutely no integrity issues with this type of trading.

Ask yourself this question. Every trade has a buyer and a seller. Why do you assume the seller (the short) has an advantage over the buyer (the long)?

15 years ago

Oh Okay Sorry. I thought you wrote it. my apologies.

No doubt there are times it can become a threat to market stability and integrity (like long selling).

Funny you mention instability………. as I have been thinking about this.

Why is stability such a adverse thing though? (not suggesting you see it that way) “Instability” is actually a good thing in my mind as it means the discounting function of the market is working.

I actually think the volatility we’re seeing now is a great thing as the market is processing lots of information as it rolls in and as consequence prices adjust. We often reading about the high level of volatility we’re seeing these days and how bad it is.

However people are also failing to see that there is an enormous amount of new and significant information hitting the market requiring digestion so the ” instability” is actually a good thing in terms of allowing the adjustment process do its thing.

Japan tried to conceal this sort of thing all through the 90’s and only prolonged their agony and possibly permanently damaged their economy.

15 years ago

Yea, the economic events causing the vol aren’t a good thing in off themselves however the vol itself is actually a positive as the market is making the adjustments through prices. Nothing really wrong with that.

When do you think “instability” isn’t good if you consider that the stock market say is an aggregated view on future cash flows.

15 years ago

Late July/ early August, ASX:CBA shot up, then slammed down, then bounced right back up again. As far as I can tell, mostly driven by rumors more than any genuine inside intelligence. This sort of excited speculation has been happening a lot lately and sometimes people get it right, other times it is total furfy. Sure you can find examples of insider trading, but you can find plenty of examples of the price jumping in completely the wrong direction too.

I actually think the volatility were seeing now is a great thing as the market is processing lots of information as it rolls in and as consequence prices adjust. We often reading about the high level of volatility were seeing these days and how bad it is.

Jumping at a rumor is still “processing information”, some rumors start as overheard conversation putting a few pieces together, others are just fanciful inventions, others are deliberate market manipulation. The US government seems to have stopped bothering to hide their “Plunge Protection Team” who happily manipulate markets with legal sanction, apparently for the good of all of us. We have seen the market cap of BHP swing by 40% twice in the last 12 months. Could anyone possibly believe that the true value of a massive company like BHP is actually changing at this rate?

When it comes down to it, there is no way to actually prevent either insider trading, or market manipulation, or large numbers of uninformed people moving in herd formation. We are better off admitting this fact, and looking for ways to move forward rather than living a lie and inventing a well supervised market has never existed, and never will exist. Lack of stability has always been a feature in Capitalist markets with documented bubbles and crashes going back centuries. The best we can do is just force companies to reveal as much information as possible, and as regularly as possible so at least the truth gets out there.

On the issue of instability… we use our Capitalist markets as a control system for our economy. The markets make real-world decisions about resource distribution and commodity valuation. There is a massive body of theory (and practice) regarding what makes a good control system, including lots of work on stability. A tennis player waiting to return serve will hop lightly from foot to foot because the slight instability actually speeds up the human mind/body response time. Rally car drivers do a similar thing by tossing the car from side to side as a corner approaches. Nyquist studied both stability criteria and the concept of a Nyquist Pulse, which is the fastest way to change the state of a system that has a limited frequency response (i.e. any system with inertia, and all real-world systems). Thai boxers stamp the floor with their right foot before kicking out with their left foot. You would think that this gives their opponent more time to defend, but actually the kick comes through faster (and harder) — Nyquist did the maths behind this result.

While low levels of instability improve the response time of a control system, high levels of instability tend to rapidly swamp any useful signal into horrible oscillations (usually escalating in size until they reach the physical limits of the system in question).

Economists traditionally don’t bother to study any of this working man’s math, preferring their own lofty theorems (which have been demonstrated ineffective by much better than the likes of myself). A basic financial system essentially boils down to a pure integral controller (pretty much guaranteed to be unstable). A financial system with tax and interest rates is more like an integral controller with a damping factor. On top of that, the whole thing is nonlinear and has a spectrum of time constants. Needless to say, the traditional economic theorems feel a lot safer than sailing out into those waters.

Economists have also seemingly become the official keepers of the chicken giblets when it comes to convincing the public that the economy is on the right track and in good hands. God knows we can’t trust physicists, because physicists gave us the atom bomb, and nobody likes atom bombs. Conveniently, while economists may be fuzzy on a lot of concepts, they have a very sharp understanding of the idea of being bought — an area of study where the scientists are still catching up. Best not to see any insider trading, until it becomes so obvious that a slap on the wrist and seriously stern words are required. Then we can all rest easy.