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Xero share trade had 'tell-tale signs' of market manipulation but didn't breach the law, expert says

Tuesday 11th October 2016

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Australian-based expert Michael Aitken told the High Court that Mark Warminger’s trading in Xero shares in May 2014 showed several of the tell-tale signs of market manipulation.

“There’s more of the tell-tale signs on this than there is on the others. It was worth looking at”, he said though he concluded that none of the 10 trades that the Milford Asset Management portfolio manager is accused of breaching securities law over was likely to create a false or misleading appearance in the market.

Aitken is chief executive of Capital Market Cooperative Research Centre and has given evidence in numerous insider trading and market manipulation cases. He designed the SMARTS real-time market surveillance system in use in more than 50 national stock exchanges worldwide, including the NZX, which he also used in the High Court at Auckland to give detailed analysis on Warminger’s 10 trades in 2014 that are under scrutiny.

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; price revision at the next day’s trading session; and uneconomic trading.

If four of those signs were found by those doing market surveillance 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.

In relation to trading in Xero shares in May 2014, Warminger is accused by the Financial Markets Authority of buying in the open of the market in a way that was designed to increase the share price, causing buyers to bid more aggressively and sellers to expect a higher price. He entered a bid for 5,000 shares at $34 when the quotes were spread between $33.61 and $33.80 and later sold 100,000 shares to UBS at $34 per share.

Warminger’s lawyer, Michael Heron QC, told the court that Warminger wasn’t aware of the sell opportunity to UBS at the time he was buying on the screen and wasn’t involved in any pre-arranged agreement with UBS broker Jeremy Coe to push up the prices of the shares and then sell to him at $34. 

“Mr Warminger sold the 100,000 shares at $34 to Mr Coe to realise a profit. Equally, he bought on screen in the morning and throughout the day because he thought the shares had upside, both short and long term,” Heron said.

Aitken said he didn’t believe the opening strategy had a material impact on the market and was unlikely to cause a false or misleading appearance in the market. But he said his view on this trade was different to the others because of the volume of shares sold later in the day. “I’m not in a position to know what happened there. Mr Coe and Mr Warminger are the only ones who know what happened.”

Coe has not been called as a witness but Warminger, who has been sitting in the back of the court throughout the trial, is due to give evidence this week.

Three causes of action by the FMA related to trading in A2 Milk between Jan. 29, 2014 and August 2016.

Warminger was heavily overweight in the stock through the $670 million worth of funds he managed. The stock had been on a downward spiral from 96 cents per share in February 2014 to around 70 cents by June/July which was affecting the performance of the funds under Warminger’s management.

The portfolio manager is said to have made aggressive trades, dominating morning trading of ATM shares in the hopes his purchases would spur other buyers into action before the share price rose even higher. He could then sell down later in the day larger volumes than what he had purchased at the higher, allegedly manipulated price.

Aitken said it may have looked a “bit odd” that such a big trader would be trading such small parcels of shares – three purchases of 500 shares – on Jan. 29, 2014 but it was not unusual for him and wasn't “inappropriate” because it was at the ask price.

It lacked credibility that Warminger’s three small orders had an impact on where UBS placed its orders in the closing auction that day, he said.

In the third cause of action relating to ATM shares traded on July 9 2014, the share price kept ping-ponging up and down despite Warminger constituting the majority of the early morning trading.

After seeing someone was selling either the same or similar quantities at a cent lower, Warminger initially thought he was trading against an algorithm and by engaging in his strategy he hoped to flush out volume, which Aitken said was a strategy he had employed successfully on two occasions in July that year.

But Warminger then realised there was “someone on the sell side playing a game”, Heron said.

He sent an email to brokers asking “who is selling ATM and hasn’t shown it to me?” It turned out to be Goldman Sachs. Aitken said whatever anyone thought of Warminger’s strategy on that day it seemed to have worked, buying 710,000 ATM shares in line with the average price the stock traded on numerous days beforehand, and countered any allegation of manipulation.

In the broader context of the day’s trading, Warminger was not happy about the ping-pong trades and “frustration more than anything” could explain why he didn’t buy from Goldman Sachs that afternoon and "why he appeared to be playing with them in the afternoon,” Aitken said.

In relation to trades on Sky Network Television on Feb. 9, 2014, Aitken said Warminger's trading was within the market's spread at the time.

“It may seem strange that he was selling and then buying back later in the day but that is for him to explain why. I have no interest in this trading because it was at the established ask in the marketplace,´Aitken said. “The less volume on-market the less relevant the market price becomes, especially at large volumes.”

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