THE DISTILLERY: Market misunderstandings

Since mid-2009, the sharemarket has basically traded between 4000 and 5000 points; investors haven't been very risk tolerant.

This morning, Australia's business commentators discuss the causes of a handful of share spikes and plunges, the regulatory implications and the degree to which ‘mum and dad on the street' investors are aware of them.

Firstly, Fairfax's Malcolm Maiden says that it's still not clear why price spikes were seen in shares including ANZ, Commonwealth Bank, Brambles and AGL at Thursday's opening last week, but suspicions are centring on a screw up rather than market manipulation.

"That finding would suit the HFT firms, which trade here through UBS and other groups including Deutsche and Citigroup, and are found worldwide even as their impact on sharemarket trading wanes. There are special trading arrangements ahead of the opening of trading on days when share price index futures are settled, as they were on Thursday morning. Orders that are part of arbitrage trades that lock in price differences between share index futures and the underlying shares are entered into the system ahead of the opening of trading, which is organised alphabetically. The buffer zone ranges from at least one minute for orders of up to $100 million to at least 10 minutes for orders of more than $900 million, and on Thursday UBS placed a $200 million sell order on behalf of a client comfortably ahead of the two-minute deadline for trades of that size. Seconds before trading began, however, the selling order was reduced to about $50 million. Buyers of $200 million worth of shares were lined up, and the imbalance showed briefly in the form of soaring share prices.”

The Australian's John Durie similarly demonstrates a solid command of the rules governing these manoeuvrings by the big firms, before offering this reflection.

"Just what caused the UBS snafu is not yet clear, but the botched trade had nothing to do with high-frequency trading – the No 1 enemy in the market today. UBS is leading the charge against HFT, which prompted BBY's Glenn ‘newk' Rosewall to say it was like the pot calling the kettle black.”

Given the nerves that would have be struck by the trading spike, it's worth also considering the analysis by The Australian Financial Review's Chanticleer columnist Tony Boyd this morning, who argues that Australians are not blind to their equity exposure.

"Former Treasury secretary Ken Henry is right to keep hammering away at the Australian over-exposure to equities but you would be wrong to think the man or woman in the street is unaware of the risks. You would also be doubly wrong to think that he or she is either sitting on their hands or completely turning their back on ways to get fully franked dividend income. Henry's latest argument is that Australians, more than any other investors in the developed world, face "sequencing risks” from their heavy exposure to equities in super… However, it is evident from what is happening in the wealth-management industry that Australians are demanding exposure to equities but without the volatility. They are after the franking credits, irrespective of Henry's claim that it is wrong to sheet home the cult of equities to the desire to get franking credits.”

Meanwhile, Fairfax's Elizabeth Knight reports that Billabong founder Gordon Merchant will just hang on to his board seat today when the company meets for its annual general meeting.

"Only last week Mr Merchant waded into the market and bought more than 900,000 shares – presumably to enhance his chances of saving his position as a director… The large institutional owners, including Perennial and Colonial, and the ASA are furious with Mr Merchant, blaming him for missing out on the opportunity to accept a takeover proposal from private equity group TPG this year at $3.30 per share. This compares with yesterday's share price of 87¢.”

Elsewhere, after having a look at the inaugural NAB Charitable Giving index, based on credit card donations, Fairfax columnist Adele Ferguson evaluates the propensity of wealthy Australians to donate money to charity. The results are particularly impressive.

Anyone interested in this area should also read a piece by Business Spectator's Rob Burgess from back in 2009. The topic is one of Australia's most famous philanthropists, the late Visy billionaire Richard Pratt.

In company news, The Australian's Bryan Frith explains how Archer Daniels Midlands managed to secure a 14.9 per cent stake in GrainCorp.

His colleague Barry Fitzgerald makes the observation that Ballarat rarely loses the ASX-listed company headquarters that it boasts, and even more rare that those headquarters would be moved to the City of Churches.

But that's just what's happening with the decision by Rex Minerals to shift its offices to Adelaide in anticipation of its development of the Hillside copper-gold-magnetite project.

And finally, The Australian Financial Review's economic editor Alan Mitchell makes the point that the treasury fiddling might just save Labor from a budget deficit, but the economy will continue to (pardon the pun) labour.