Australian market manipulation expert tells Warminger trial of 7 tell-tale signs

Tuesday 11th October 2016

An Australian-based expert giving evidence in the trial of Milford Asset Management portfolio manager Mark Warminger has outlined seven tell-tale signs of market manipulation and said at least three need to be present to warrant warning bells to market regulators.

Micheal Aitken, chief executive of Capital Market Cooperative Research Centre, is said to be one of the leading experts in the world on market manipulation and designed the SMARTS real-time market surveillance system in use in more than 50 national stock exchanges worldwide, including the NZX.

Warminger is accused by the Financial Markets Authority of breaching securities law that prohibits trading that is not for a genuine commercial purpose and creates an artificial appearance in the market in relation to 10 sharemarket trading actions carried out in 2014.

Warminger’s defence counsel have said Aitken will give evidence that after reviewing each of the 10 trades he concluded there is not a single instance where the portfolio manager’s trading has or was likely to create a false or misleading appearance.

Aitken told the court there were seven tell-tale signs of market manipulation: establishing a new bid/ask price; moving the bid/ask three price levels aggressively without testing the market; trading in small volumes; trading at the close of a session; no independent auction; reversion of price at next day’s trading session; and uneconomic trading.

If four of those signs were found it would have to be taken seriously and an investigation after three signs would depend on that particular trader’s other instances and trading pattern alerts, he said.

Aitken said a charge of market manipulation can still be challenged based on a legitimate reason to trade such as “the need for a portfolio manager to conduct a cash flow trade, meaning a trade where he is required to invest net inflows of cash into a fund”.

“Even in these circumstances, however, a professional trader has to be mindful of their general obligation to not bring the market into disrepute. Many exchanges will levy fines on brokers who themselves or through their clients’ trading by DMA (direct market access) execute orders clumsily,” he said.

Aitken is going through each of the 10 trades in detail, starting with the first course of action - trading in Fisher & Paykel Healthcare shares on May 27, 2014. He said only one of the tell-tale market manipulation signs were evident during Warminger’s trading of FPH shares on that day – establishing the bid and ask price.

The prosecution accused Warminger of buying shares to push up the price of the stock from its opening price of $4.32 through several trades totalling 155,000 shares and then later selling 500,000 shares at the allegedly manipulated higher price of $4.35. The buy trading resulted in a loss when commissions were taken into account which meant there was “no economic rationale” for them, the prosecution said, while he made healthy profits from the shares sold.

Aitken said Warminger started his trading at an already established ask price and traded in reasonable volumes given what was on offer.

Once he had executed at the best ask price at the time, he left the rest of his order to trade against the remaining liquidity for the stock at that price and his subsequent orders were entered after a short period of time to allow the market to respond, Aitken said.

Warminger was entitled to believe from the previous day’s trading and his knowledge of the buying interest that a sell price of $4.35 was achievable and “even if he was confident of a $4.35 crossing trade than any shares acquired below that price were likely to be good buying, which is a legitimate commercial purpose for buying the 155,000 shares,” Aitken said.

Those undertaking market surveillance could have considered the $4.32 opening price for that day’s trading and questioned the brokers’ activity as to why it was at that price given it had been trading around $4.35 the day before, he said.

But Chief High Court Judge Geoffrey Venning said “thankfully, he didn’t have to decide” on the brokers’ actions.

The case is continuing and Warminger, who has been sitting in the back of the court for most of the trial, will give evidence later.

BusinessDesk.co.nz

Comments from our readers

No comments yet