'Tipping' leading to trading spikes
Some Australian brokers are "tipping" privileged clients about private analyst recommendations to buy or sell stocks before those recommendations are made public.
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".