trading bible, page-19

How day traders fuelled a $1bn frenzy
Author: Neil Chenoweth
Date: 13/10/2006
Words: 3345
Publication: The Financial Review
Section: News
Page: 1

Some investors clocked up heavy losses the day copper hopeful Cudeco briefly became a billion-dollar enterprise. But Neil Chenoweth reveals how others made millions.

In the frenzied moments at the top of the Cudeco share spike, a hapless computer operator at Aequs Securities keyed in a buy order for 5000 shares "at market".

At 10.24am on July 5 this year, the Australian Stock Exchange SEATS computer system matched the Aequs buy order with four separate sellers, including two at $10 a share.

Bingo. In half an hour the market value of Cudeco - then known as Australian Mining Investments - had jumped $500 million. For several thousandths of a second on that day, Wayne McCrae's little copper hopeful was a billion-dollar enterprise. Then the fall began.

By the time the ASX suspended Cudeco at 10.58am, $51 million of stock had changed hands. It was the worst day for Australia's day traders since the tech crash. With Cudeco suspended, the traders at CommSec and E*Trade were forced to pay out between $8 million and $32 million for newly bought shares that they had planned to on-sell well before the three-day settlement deadline, only to see their new shares dive to $2.55 when trading resumed on July 17 before closing at $3.56.

Since then the stock has struggled to break $4.

Cudeco chairman McCrae was one of the winners. Seven minutes after Cudeco hit $10 on July 5, McCrae sold his first parcel of options for $56,000. He raised another $2 million selling more options after the suspension was lifted.

His remaining shares are worth $44 million, and next Monday shareholders will vote to ratify a further $35 million in options that he and the two executive directors awarded themselves for their good work.

Meanwhile, the day traders' chat sites and online forums in July were a world of pain. Who was responsible for this mess?

The wild price surge didn't happen by accident, McCrae announced. It was the product of short selling by "opportunistic traders and market makers to cover their positions", which he had reported to the ASX.

But investigations by The Australian Financial Review suggest the picture wasn't that simple. Fateful decisions by a much wider cast of players left Cudeco facing the perfect storm.

The most aggressive trading in the last days before the July 5 suspension was by Cudeco sponsoring broker Aequs Securities, previously known as Hudson Securities. Several Perth brokers were also supportive. However, it is also possible that the share squeeze may have been inadvertently produced by Cudeco's own actions.

A former chairman of Hudson Securities, David Sutton, is now executive chairman of corporate advisory group Martin Place Securities, which claims to hold 20 per cent of Cudeco stock and which produced a bullish draft report on the company, reported in a national newspaper, that valued the shares at $25.

Earlier this week, Barry Dawes, author of the Martin Place draft, told a trade journalist that he was about to release a revised version of his report that repeated the previous forecasts.

There are also questions over the role of several influential contributors to online investor forums, most notably HotCopper, who spruiked Cudeco stock and provided detailed information about the company and claimed to have been briefed by brokers.

An Australian Securities and Investments Commission inquiry into the Cudeco trading is continuing. A more immediate issue is how well the safeguards put in place to protect small investors are working.

The online forums had a critical importance because the Cudeco share price, like many in the small-stocks sector, was driven by day traders.
" says a senior market figure. "The daily turnover makes a lot of money for the ASX."

It represents $1 billion of highly mobile capital. When it moves, the market takes notice. But how to get the day traders' notice?

An AFR study of 14,000 share and option trades between June 1 and July 5 - and 5000 postings on investment forums - shows that day traders at CommSec and E*Trade accounted for 40 per cent of the buying for the period. Day traders were buyers or sellers in two out of every three trades by number and by value.

What followed left everyone who invested up to July 3 very rich - and beggared almost everyone who bought in after that. E*Trade investors bought early and made a mint. CommSec clients lost their shirts.