'Tipping' leading to trading spikes
Those tips to privileged clients are leading to "abnormal trading volumes" on associated stocks before those recommendations are made public, new research has warned.
A leading market research panel says it has examined publicly available data containing broker IDs for about 3800 analyst recommendations on 338 listed stocks.
The Capital Markets Co-operative Research Centre says it has looked at the volume of trades made by certain brokers - both before and after analyst recommendations were made public - and found "clear spikes" in trading volumes by some brokers before the analyst reports were made public.
Research centre chief executive Michael Aitken said while the behaviour might not be illegal, it gave an advantage to those "in the know".
"A direct relationship exists between recommendation changes, from buy to sell or vice versa, and volume, as significant changes in trading volume eventuated from recommendation changes," Professor Aitken said.
"After the private release of the information, trading activity increases most significantly for small and medium-cap stocks."
Since smaller stocks had less analyst coverage, it was likely that analyst recommendations in those stocks provided new information to the market, which provided greater profit potential from "tipping" activities, he said.
The research comes after the Australian Securities and Investments Commission warned that it would start spot checks of official briefings between analysts and companies listed on the stock exchange.
The warning followed a scandal last month involving Newcrest Mining, in which a number of analysts and investors appeared to anticipate a restructure of the company before the rest of the market.
The plan has been questioned by the broking community, some of whom wonder how ASIC will be able to monitor all conversations that take place between companies and analysts.
The Australian Securities Exchange has relied on research from the research centre in the past to support its case against the unchecked growth in so-called "dark pools".
Frequently Asked Questions about this Article…
Tipping refers to brokers or analysts passing private analyst recommendations to privileged clients before those recommendations are made public. The article says these tips can give an information advantage to those "in the know" and have been linked to abnormal trading volumes, so everyday investors should be aware that some market moves may be driven by privileged early information.
The research centre examined publicly available data with broker IDs covering about 3,800 analyst recommendations on 338 listed stocks and found "clear spikes" in trading volumes by some brokers before analyst reports were publicly released, indicating a direct relationship between recommendation changes and significant shifts in trading volume.
According to Capital Markets CRC chief executive Michael Aitken, the behaviour might not be illegal even though it gives an advantage to those privy to the information. The article notes the concern is about fairness and market advantage rather than a definitive statement that all such tipping is unlawful.
The article states trading activity increases most significantly for small and medium‑cap stocks after private release of analyst information. Because smaller stocks have less analyst coverage, a recommendation can provide new information and greater profit potential from tipping activities.
The Australian Securities and Investments Commission (ASIC) warned it would start spot checks of official briefings between analysts and companies listed on the exchange. That warning followed a recent scandal and reflects regulator interest in monitoring where non‑public information might be shared.
The article refers to a scandal involving Newcrest Mining in which a number of analysts and investors appeared to anticipate a company restructure before the wider market, prompting regulatory attention and contributing to ASIC's decision to increase spot checks of analyst‑company briefings.
The Australian Securities Exchange has previously relied on research from the Capital Markets CRC to support its case against the unchecked growth of so‑called "dark pools." The article links the research on pre‑release trading spikes to broader market transparency concerns, including dark‑pool trading venues.
Based on the article, investors should be alert to unusual or abnormal trading volumes and sudden recommendation changes, especially in small and medium‑cap stocks. The piece also highlights that ASIC is increasing spot checks of analyst‑company briefings, so investors may see more regulatory scrutiny and related market announcements going forward.
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