JJOHNSON
WITH THE growing interest in and rapid development of the stock market, the Council of the Jamaica Stock Exchange initiated this series of weekly columns designed to educate Jamaicans on how the stock
market works and on other related matters.
Excerpts of a presentation by Executive Chairman of the Jamaica Stock Exchange, Roy Johnson, at the Financial Services Commission's Seminar entitled, 'Deterring Market Manipulation and Insider Trading' on June 29, 2005.
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market. This is typically done by either spreading false or misleading information in order to influence others to trade in a particular way or by using buying and selling orders deliberately to affect prices or volumes in order to create an opportunity for profit.
Market surveillance is responsible for monitoring trading activities on the floor of the JSE by broker members on a daily basis. Prices and volumes of stocks continually rise and fall. Surveillance is intended to detect any trading that falls outside of the normal pattern of changing prices and volumes. So there are certain issues that market surveillance must be alert to:
a. Disclosure.
b. Market manipulation.
c. Trading rule breaches.
d. Insider trading.
In addressing the issue of disclosure, the JSE is guided by its Policy Statement on Timely Disclosure, which is Appendix 8 of the JSE Rules. Under this rule, the JSE deems it necessary for companies to make timely disclosure of "material information" concerning its operations. Events or happenings that warrant timely disclosure include:
1. Changes in share ownership that may affect control of the company.
2. Changes in corporate structure, such as reorganisations and amalgamations.
3. Take-over bids.
4. Major labour disputes or disputes with major contractors or suppliers.
5. Public or private sale of additional securities.
6. Borrowing of a significant amount of funds.
EXAMPLES OF MANIPULATION:
I. Price Manipulation
This involves the placing of 'buy or sell orders' or both, into the trading system in order to change or maintain the price of a stock. The motives for trying to do this are:
a. To increase the value of a position for finance or accounting purposes usually near balance sheet time.
b. To cause a price rise so that investors are attracted to the stock creating demand so that the manipulator can sell (pump and dump).
In identifying price manipulation, the JSE uses a combination of automated and manual systems. The JSE has created a safeguard for price manipulation through the Circuit-Breaker Rule. This has prevented wide price swings in stocks, which can be an element of price manipulation. As a matter of course, whenever a stock hits the circuit breaker, it cannot trade until market control intervenes. Part of the process is to check the accounts and volume in the trade.
In addition to the circuit-breaker limits, market surveillance looks for price aberration. Tracing the trends of the stock may identify this. There is no specific value or incremental change that spurs investigation. Therefore, it could be a penny stock or high-value stock that comes under the microscope. Essentially, the JSE looks for a change in trends.
II. Marking the Close
This is the making of a purchase of a security near the close of the day's trading with the objective of affecting published prices, particularly the reported closing price. This might be done to avoid a margin call, to support a flagging price or to affect the valuation of a portfolio. This is usually done by trading a small volume of shares just before the market closes.
Marking the close has become a creature of most, if not all markets, that have been automated. In addressing this, all "last- minute trades" are checked. The surveillance operation pays close attention to the volume and the names involved in the trade. Our investigations sometimes lead us to request order books and clarification of trading patterns.
III. Wash Trades and
Pre-Arranged Trading
A 'wash trade' is a trade in which there is no change in the beneficial ownership of the securities. The buyer is in reality the seller - a pre-arranged trade involving two parties trading on the basis that the transaction will be reversed later. Sometimes this is done to give the market the impression that there is interest in the stock.
We can also have prearranged trading when a broker makes a deal with another house to conduct a trade at a particular price then trading is arranged to be executed in a particular manner to escape market intervention.
In identifying these trades, market surveillance examines most crosses. In the examination process, we look to see if such trades are for persons with the same interests.
Apart from examining crosses, the JSE looks at trades between houses. A critical element in determining Wash Trades is the name or names on the account. This information is logged in the Jamaica Central Securities Depository.
IV. False or Misleading Information
Companies may be tempted to release information they had previously released or present information in an overly opportunistic manner in order to generate interest in the company's securities. When perpetrators use the opportunity created by false information, which results in the strengthening of the price of their stock and sell, they are guilty of 'hype and dump'.
In tracking false or misleading information we:.
1. Attend company briefings;
2. Broker briefings;.
3. Are included on the brokers' mailing lists, both electron
ically and physical;.
4. We examine websites.
V. Trading Rule Breaches
Trading is monitored each day to ensure that stockbrokers comply with the JSE's rules. Our rules are designed to ensure that trading is fair to all participants and that the market is orderly. You, of course, understand that there are those in the market who make money when there is volatility. We therefore have to ensure that the best execution practices are observed. We have seen instances where bids are entered at a price that deliberately prevents a stock from trading.
INSIDER TRADING
This occurs when someone obtains information about
an entity and trades in that
company's shares when the information has not been made public, and would affect the
entity's share price. The JSE, as you realise, does not have an overwhelming volume of transactions. We are to this point, able to watch the market and detect when there are price movements which do not seem to be justified by the information made available to the exchange. Our recourse is to immediately contact the company to determine whether there is information that has not been published which would affect the price of the stock. If there is information, we require that it be immediately made available to the JSE and all investors, and we then examine who has carried out the trades, on whose behalf and what insider connections they might have.
In uncovering or trying to uncover insider trading, JSE's surveillance operations:
1. Examine daily market activities.
2. Examine listed companies' submissions, particularly financial statements and announcements.
In examining the daily trading activities, the JSE maps volume and price movement to individuals who are trading. It should be noted that the tightly-coupled system of the trading platform and the JCSD, gives surveillance personnel account details such as:
1.Their name.
2.Inventory position.
3. Address.
4. Joint holders.
Another dimension to this surveillance exercise is to track trading patterns or activities whenever there are pending actions such as:
1. Board meetings.
2. Corporate actions.
3. Submission of financial statements.
The JSE recognises that insider activities and investigations can be a complex web. Nevertheless, its surveillance operations are guided by Model Code JSE 09/2003, which sets guidelines for black-out periods for trading by directors. In applying the code, the JSE tracks trading activities, by directors and their connected parties. We have never uncovered evidence warranting reference to the Financial Services Comission previous to the Dyoll issue of insider trading.
We have clearly signalled to
the market that there are eyes watching you to ensure that
we maintain the integrity of our market.
