JSE equity and bond prices show marked moves before major corporate and political announcements, writes Jacques Magliolo
RESEARCH by the Mail & Guardian shows definite evidence of insider trading in equities and bonds linked both to corporate announcements and major political developments.
To prove how widespread the insider network is, we conducted extensive research to assess market movements. This was carried out in two phases; the first looked at a number of corporate finance deals conducted in 1993 and the second looked at all major political and union events since the release of President Nelson Mandela.
Market movements were then looked at relative to dates of events and the findings were astounding.
Corporate finance deals have to be announced in two ways through the press. Firstly, the company concerned has to make a cautionary announcement to warn shareholders that certain negotiations are being conducted which could affect the share price. The second is a more comprehensive statement to explain to investors what has been negotiated or to tell them that such discussions have been abandoned.
The cautionary announcement is the first official warning made and any prior knowledge of such negotiations constitutes a breach of the insider trading code.
With this in mind, in nearly all corporate deals it became evident that a trend exists. The day prior to the cautionary announcement being made, the price moved up. However, on the actual day of the cautionary, the price of the share remained static.
The following corporate deals conducted during 1993 highlights this:
* Gencor’s aim to acquire Richard’s Bay Minerals for R671-million was first cautioned on December 1 1992. The previous day the price rose from 965c to 1 000c. The day of the announcement the price remained at 1 000c and climbed marginally on the April 21 1993 when full details were released.
* Bidvest’s target purchase of Safcor for R261-million was cautioned on June 21 1993. The previous day the share rose from 7 250c to 7 500c and remained static on the press statement.
* In January 1993 Reunert targeted Panasonic for R235-million. The previous day the share climbed from 3 400c to 3 500c and also remained static the following day.
* Murray & Roberts’ aim to buy Standard Engineering for R155-million was cautioned June 4 1993. The day prior to a press statement the share climbed by 300c to 4 500c and stayed there on the announcement.
* Wooltru’s purchase of Dion stores for R90-million sparked no reaction on the day the deal was cautioned on July 30 1993. However, on the 29th the share moved from 6 350c to 6 425c.
Says the head of a major accounting firm: “Given the dates and the related share movements prior to the issue of a cautionary announcement, it would be simple for the JSE to look at who the sponsoring brokers were and to investigate whether an information leak was evident from that broker.” The Mail & Guaadian has established who the sponsoring brokers are and is willing to submit this list to the JSE on request.
Wherever one went, the reaction was the same. Accounting firms “have done similar exercises before”, but to release the information to the JSE “would be detrimental to business as clients would remove their accounts and place them elsewhere”.
With the help of Duncan Innes of The Innes Brief, similar trends were established when political events were assessed. Research on the government benchmark stock R150 established that the market moved prior to official announcements being made. The following list looks at one event a year from the release of President Nelson Mandela in 1990 to Inkatha’s joining the election this year:
In February 1990, former president FW e Klerk unbanned the ANC, Pan Africanist Congress and the South African Communist Party. Rumours of the release of Nelson Mandela seemed to filter through to the gilts market and, during the previous day, the rate dropped to from 15,60 percent to 15,50 percent.
* In December 1991, the signing of the Peace Accord had little effect on the rates, which “is normal in December”, say a bond dealer. However, the day prior to the accord, 688-billion gilts were traded, while only 432- billion were traded on the signing day.
* In 1992 the call for a last white referendum had marginal affect on the gilts market. The day before the announcement the rates dropped slightly from 16,84 percent to 16,81 percent, but returned to previous levels the following day.
* On October 23 1993 — the day before the lifting of sanctions was called for — the gilts markets dropped a full two points, from 13,30 percent to 13,10 percent and closed the following day on 13,00 percent.
* In addition to the resignation of Finance Minister Derek Keys this month, 1994 saw another event which could not have been foretold. A mere nine days before the first democratic elections in South Africa took place, the IFP declared that it would take part in the elections. The day before it officially made its commitment in the press, the markets reacted wildly. The rate fell from the morning’s 13,35 percent to close at 13,23 percent. The next day the trend continued and the rate dropped to 12,89 percent.
“If one looks at the profits made on each point movement, then it becomes obvious why insiders cannot resist trading on privileged information,” says stockbroker James, a fictitious name for our well-placed and reliable source. He indicates that, if the rate falls from 15,00 percent to 14,99 percent, R500 profit is made per R1-million gilt traded.
When placed in the context that R800-billion worth of gilts was traded last year, it is understandable why insiders feel that “it is worth the risk of being caught”, he says.
Meanwile, insider traders are worried and could go underground, he warns, adding that “anxiety is rapidly spreading among gilts dealers”.
The anxiety comes after the Mail & Guardian’s recent report on front running by gilt traders and the subsequent announcement by the Johannesburg Stock Exchange that it has referred all bond transactions by market participants on July 5 to the Securities Regulation Panel and the Bond Market Association.
“There is nowhere to hide, no place which cannot be accessed and no information which cannot be obtained,” says James. “Insiders have informants among cabinet ministers, economists, the Reserve Bank, businessmen, corporate financiers and often even resort to blackmailing stockbrokers.”