One of the smartest day traders in Australia recently thought he could outsmart the ASX surveillance system and make money from a classic 'pump and dump'.
The trader, who was well known to the ASX surveillance staff, used four or five accounts at two different brokers to ramp up the bid and offer spread on a mining tiddler called Corvette Resources.
He loaded up the bid schedule with 25 of the top 28 bids. This eventually smoked out buyers at prices 25 to 30 per cent higher than where the stock was trading before the exercise began.
The trader effectively created a false market in the company's shares. When the buyers emerged he sold stock to them at a profit during a brief period of frenzied trading that included him selling stock to himself.
The ASX Smarts alert system set off the alarm bells about what the trader was up to. The Smarts system triggers warnings when the price or volume movements in stocks exceed predetermined parameters.
When this information about Corvette was combined with the ASX knowledge of the brokers used by the one trader, the scam was obvious.
The ASX won't comment on the case, but it is fair to assume that the Corvette Resources market manipulation incident was referred to the Australian Securities and Investments Commission.
It is one of the many “war stories” that emerge on a weekly basis from the ASX surveillance department as it goes about its monitoring activities.
The department's biggest scalp in the past year was Mukesh Panchal, the former company secretary of Queensland Gas Corporation.
He was jailed in April for two years after being found guilty of insider trading. He purchased 400,000 QGC shares valued at $1.3 million between January 15 and February 1.
Panchal profited from his inside knowledge of the imminent $870 million merger deal with British-based BG Group Plc. He was forced to return the profits but kept the stock.
The discovery of Panchal's insider trading was a relatively simple exercise because his activity stood out like a sore thumb.
After every merger transaction is announced, the ASX staff review recent trading activity. The trading data prepared following the BG bid for QGC clearly showed that Panchal's trading, using a broker in New Zealand, was the biggest trade by an individual.
The ASX actually wrote to 15 different parties following its analysis of the QGC trading done in the lead up to the bid.
The fact that Panchal's trading stopped on the Friday before the bid was announced made the ASX analysts very suspicious. But the clincher was a simple enquiry to the NZ broker who informed the ASX that Panchal was the QGC company secretary.
They don't come easier than that.
The trickier ASX surveillance jobs usually involve stocks outside the top 100 that have either plenty of liquidity or are thinly traded and easily manipulated.
A good example of this was the recent market manipulation by a trader at Tricom in the DKN Financial Group. That trader was found to be propping up the share price with trades just before the close of trading.
One activity that the ASX has been keeping a watchful eye out for recently is baiting bids designed to trigger a response from an algorithmic trading system.
An Algo trading computer often responds to changes in certain parameters such as volume weighted opening price. Algo trading systems can be found at all the big investments banks.
The ASX surveillance team's analysis of trading in DKN made it pretty clear that something fishy was happening. The Tricom trader accounted for less than 1 per cent of turnover over a three month period but was responsible for 53 per cent of the price appreciation.
The Smarts alert system is throwing up about 300 to 400 alerts each day. About half of these require a written response from an ASX analyst to be entered into the system.
Surveillance at the ASX is gaining more victories than would be apparent from the list of prosecutions by ASIC. Anecdotal evidence says that only about 15 per cent of referrals are resulting in prosecutions.
NXS Price at posting:
36.1¢ Sentiment: LT Buy Disclosure: Held
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