The below was posted on another forum :
"Manipulation Trading: Collusion: Wash Trades: Short Selling = illegal practices
On the ASX, it seems that share market manipulation has gained acceptance as somehow being normal, or a fact of life in modern markets, if only because of an apparent tolerance by regulators and with convictions few in number and lightly dealt with whenever cases are prosecuted. It may also be because the activities where manipulation is able to take place are able to be easily camouflaged and therefore difficult to gather evidence. Also, if manipulative behaviours are connected to legal activity such as short selling it tends to provide a free get-out-of-jail card.
The acceptance of manipulation as a legitimate approach to trading appears to have extended to the very top levels of governance in our financial markets with the market operator itself, i.e., the ASX, suffering the ignominy of having two of its Directors having to stand down because of illegal short selling activity.
In the above context, empirical trading data that consistently throws up anomalies needs to be taken notice of. Research findings have consistently drawn attention to 3 pillars of trading where operational flexibilities make share price manipulation eminently achievable.
They are:
The system of trading;
The system of settlements; and the
The system of short lending and securities lending in general.
Crucially, the flexibilities inherent in the three systems can facilitate manipulation if only because of the opaqueness of dealings of a majority of the trading taking place. Also, it is possibly no coincidence that the majority of trading that lacks transparency is that associated with institutions.
However, the one given in modern markets is that share price manipulation issues would disappear overnight if initiatives were implemented that demanded full transparency in all levels of dealings.
Share price manipulation is embedded in all of the following trading activities taking place on the ASX on a daily basis:
The selling of shares by entities back and forth to themselves or affiliated entities (formally or informally and referred to as trading churn) with orders distributed amongst a large number of brokers to camouflage the activity. Trading churn is generated by algorithms synchronously tuned by brokers acting for the same interests. It usually results in control over the market, the setting of artificial prices and little change to beneficial ownership. If tested in court the motivations behind the churning of stock are likely to be shown as non-genuine and therefore manipulative. The high levels of collusion required for the selling and subsequent retrieving of large parcels of shares, such as has occurred with CuDeco, and many other ASX stocks, also points to contrived, non-genuine markets.
The re-balancing of holdings without price discovery through extensive use off-market transfers and through trades executed in Dark Pool venues.
The use of Dark Pools for strategic trades thereby removing liquidity from the lit market which is then subject to volatility as genuine buyers and sellers attempt to fill orders in thinner markets.
The implementation of particular trading agendas through designated brokers but with trading organized through other brokers in support, (e.g., buying or selling through one or more brokers but churning stock through others in an attempt to control, manage or confuse the market. This activity was noted in ASIC Complaint 2013-2 coinciding with M&G building a major stake in CuDeco).
The use of proprietary trading programs that deliver control over pricing levels, for example, by forcing Downticks between groups of brokers who are effectively colluding with their trading. The collusion is facilitated by HFT algorithms able to link designated sellers with preferred buyers and is usually characterized by either large numbers of small trades that lower prices, or by small broker crossings put through the market to achieve price reductions.
The selling is seen to be targeting lower prices with brokers changing roles from one day to the next as prominent sellers. Such trading is highly manipulative, and was also shown to occur across other ASX companies .
A further example of selling that has targeted lower prices is provided by a particular broker’s selling activity regarding CuDeco over the recent period August 29 to September 30, 2013 as shown below.
The large numbers of small Downtick trades that forced lower prices meant that the broker was responsible for a very large number of falls in price in daily trading, despite miniscule overall selling volumes put through the market.
The behaviour is at extreme odds with the High Court ruling that regards genuine sellers as those looking to receive the best returns for sales. Of course, non-genuine selling implies manipulation.
Control (again via trading algorithms) over the setting of prices during auctions.
Using the system of short selling as a manipulative trading tool whereby downward pressure on the share prices occurs through short selling in the market and where adjustments to short exposures are achieved in off-market dealings. Such activity is unfair as it avoids fair price discovery. The activity also requires collusion by those with short exposures needing to cover, and those who are willing to supply shares off-market to help reduce exposures.
Daily short selling on market and short covering on-market representing trading churn for the most part, where strategic relationships between brokers ensures that stock shorted into the market can be readily retrieved (i.e., buyers of stock are happy to put it back into the market where it can be re-claimed by the selling entity). Much of the activity represents a zero-sum game.
Wrong-footing and panicking retail investors through tactics such as deliberately selling down announcements that herald major developments for the Company. A disappointing share price reaction invariably takes away from the significance of an announcement and leads to investor confusion and angst. In the case of CuDeco the activity has been shown to occur over a period of 3.5 years.
Registering substantial holdings of a single entity across multiple nominee accounts within an institution or across multiple accounts with multiple institutions. The arrangement provides the substantial holder various options to deliver buying and/or selling orders into the market with the market again compromised by non-genuine trading churn.
Panicking investors by using large buy bids to support a share price and then suddenly selling into the bids to give the appearance of price weakness, but where the buying and selling has been between related parties.
Capitalizing on trading volatility by entities engineering price falls in trading between themselves that lead to the margin limits of exposed investors being triggered causing irrational panic amongst retail investors, which in turn accelerates price falls.
Camouflaging extensive levels of Wash Trade activity (i.e., no changes to beneficial ownership) by putting many of the trades through brokers with large numbers of retail clients and then settling on the net positions at the close of trading.
Entities operating within, say, Commonwealth Securities camouflaged by retail investors while heavily targeting pricing levels with, for example, large numbers of small Downtick trades. The result is that falls in price are attributed to retail investors, not the sophisticated investors responsible and who have deliberately targeted lower prices.
Taking advantage of a settlement system where the brokers used for high volumes of dubious institutional trades are not identified on the register, thus further camouflaging the trading activity.
Taking advantage of unreliable reporting systems to disguise trading activity as evidenced by substantial changes in short positions not being matched by corresponding changes in stock lending & stock borrowing data, and where for example a large increase in open positions is usually not reflected on the register by corresponding falls in the lender’s holding.
The deliberate selling down of a holding to create volatility only to re-purchase shares as investors panic.
The leaking of information to the media by Company insiders, such as in the case of Billabong, where the ‘news’ items so generated are used to justify specific trading agendas.
Flooding the market with bids and offers that only stay for brief moments of time to encourage activity from genuine sellers (or buyers) at reduced bids or higher offers.
Front running retail orders by changing the bid structure between the time the retail investor sends the order and the time it takes to reach the exchange. The activity results in retail sellers receiving less for their shares and paying more for purchases.
The use of public forums to establish sentiment that supports particular trading agendas often achieved by groups of posters banding together to create maximum levels of confusion.
The selling down of the share price through related interests or through genuine sales knowing that cheap placement shares will be forthcoming to replace those sold.
The withdrawal of liquidity at critical times when for example a company-specific problem or a market sentiment issue (e.g., a strong downtrend on Wall Street overnight) might encourage selling. In that scenario the withdrawal of bids may cause a genuine seller in need of cash or pressured because of margin requirements, to chase prices lower as each time he sells into a buying bid, the bid is adjusted out of the way by the time the sell order reaches the exchange.
In frustration and perhaps through necessity because of the need to raise funds, the seller may then target a lower buy order to try and get a fill, only to see it adjust too in the fraction of time his order is finding its way to the exchange. The lightning fast adjustments are afforded by HFT algorithms where the buyer may withdraw from the market altogether, or the buy order may be adjusted downwards or even involved in a crossing to a related party, whereby all actions effectively prevent the seller from getting a fill for his order. In such instances the notion that markets provide liquidity is farcical.
Such activity is particularly manipulative and can use genuine, motivated sellers to force prices dramatically lower. Examples include trading in CuDeco on August 18, 2010 following a resource upgrade and November 13, 2012 following a fund raising announcement. Both days saw extreme volatility with the share price taken dramatically lower amid confusions on Aug 18, and lower despite positive news on Nov 13. Anecdotal and empirical evidence both suggest share price manipulation was strongly at play, irrespective of the news events accompanying the price falls. Revealingly, on both occasions, sophisticated investors retained their holdings despite very extensive churning of stock.
Justifying manipulative selling or buying due to index movements of the sector a stock belongs to, but where shares are simply traded back and forth between the same interests for no beneficial change to ownership.
Changes to major indexes are a primary driver of modern day markets, irrespective of the fundamentals associated with particular companies outside the index, and for that matter, individual company news. An article by broker Marcus Padley refers to a small group of large stocks almost completely dominating the main index in a downward trend that occurred between May 2011 and August 2012. Just 20 stocks accounted for 97 per cent of the fall in the market or put another way, 10% of the stocks have dictated 100% of the performance of the ASX 500 index over the period.
Given that a select few stocks can control the direction of the entire market, means that individual stocks can be manipulated at will irrespective of news releases and any company developments achieved. It further helps to explain how good news is suppressed (i.e., it was the index that led prices lower) and it helps to explain why CuDeco has tended to have been harshly dealt with on days that the general market was down. Pressure from falls in the leading index can act as a cover for higher levels of manipulative activity in individual stocks. Short selling representing 91.3% of all selling in CuDeco on Aug 9, 2012, with all sales by institutions is a case in point (Refer ASIC Complaint 2013-1 Section 8.1.9.5 Pg. 106).
It is also interesting that as far as CuDeco is concerned, the managed, custodial holdings relating to the five investment banks on the register control at least 75% of all trading and at times up to 86% of all trading as measured by registry share flows. Yet the institutions represent only 0.1% of CuDeco’s 8,000 shareholders. The situation focusses further attention on cartel-like activity being responsible for control over trading and creating an artificial pricing environment.
AN EXAMPLE OF SHARE PRICE MANIPULATION ACCOMPANYING INDEX VOLATILITY
Major market moves can certainly be initiated by influencing or manipulating the leading indexes. A case in point was the index volatility engineered on October 18, 2012 where prices of major stocks including ANZ and Brambles were bid up prior to the open, adding $10 billion to the benchmark S&P/ASX 200 Index. However orders were withdrawn just seconds prior to the market opening leaving traders who bought at the opening high and dry and facing immediate losses. Those buyers would have been encouraged by the increase in the index pre-trade and would have placed bids accordingly.
Such an obvious manipulation with the selling into phoney index rises meant that sellers reaped the benefit of the hoax. The incident was investigated by ASIC assisted by the broker responsible for hosting the transactions, who was UBS Securities. Nothing ever materialized with either UBS clients or UBS market operators clearly responsible. No charges have been announced and it is not known if the entities responsible were ever identified or indeed contacted. The incident again demonstrates the Finkelstein assertion which essentially stated “lenient sentences for white collar crimes lead the public to conclude that there is "one law for the rich and another law for the poor”. Only on this occasion rather obvious misdemeanours didn’t even make it to court.
FURTHER OBSERVATIONS: Wash Trades and Dark Trades
Wash Trades are illegal. However, with the use of algorithms, trades that achieve the same result as Wash Trades (i.e., no change to beneficial ownership) are able to take place without intervention by the market regulator. The fact that other brokers are involved when sales by an entity are recycled back and forth between a mix of brokers, before being repurchased by the original selling entity, appears to avoid being regarded as a Wash Trade. However the trading can most definitely result in artificial prices particularly if many of the brokers involved are colluding with their trading. Careful analysis through audits may reveal that all of the buying and selling associated with such trading activity that doesn’t result in changes to ownership, is in effect akin to share price manipulation as defined by the High Court judgement. Stock lending cannot be traced and the ASX, which runs and regulates the Australian Stock Exchange and Sydney Futures Exchange, admits it has no idea what proportion of shares have been "lent" to traders.The reluctance by the regulator to conduct audits and to get to the bottom of dubious trading practices may in effect be sanctioning share price manipulation on a very large scale with implications for the entire market.
Short Selling
Short selling is legal on the ASX but practices associated with short selling that result in artificial pricing are illegal. The key to assessing whether provisions that allow shot selling are being abused is the impact on fair price discovery. If prices are inflated and short selling lowers them to more realistic levels, then any subsequent purchases to make a profit from the activity, is a legitimate trading activity. All market participants generally don’t have a problem with such an arrangement.
The most obvious abuse of provisions that condone short selling were addressed in the introduction to the Senate Submission where collusion between custodians and hedge funds is likely to be responsible for both severe undervaluations of companies and large amounts of wealth removed from those with shares held under custodial arrangements.
Another example of the abuse of short selling provisions is where prices are reduced to artificial or undervalued levels through short selling, and then for exposed open short positions to be covered by activity that avoids price discovery. Research has demonstrated that it is common practice for large short positions to be unwound through off-market adjustments which avoid price discovery, not through the re-purchase of shares through the market. Also, short positions are sometimes covered through forcing prices lower to make companies vulnerable when having to raise capital, and then securing cheap placement stock from the company to cover positions. Dubious short selling practices are accepted almost without question by the regulator under the guise, ‘short selling is legal’ which it is. However, the recent High Court judgement would suggest that in some cases it represents share price manipulation through the imposing of artificial constraints on pricing levels, which happens to be viewed as illegal.
Abuses of short selling possibly represent the single most potent trading activity responsible for generating artificial pricing levels. Chronic undervaluations in a large number of ASX companies, including CuDeco, are the direct result of manipulative short selling practices.
CONCLUSION
The behaviours are being repeated across other ASX companies suggesting a heavily compromised ASX market.
2. The laws concerning trading covered under the Corporations Act and through the Australian Competition and Consumer Commission (ACCC) are being flaunted through the activities of entities that are heavily camouflaged by a trading and settlement that lacks transparency; and
3. ASIC, the official watchdog of the financial markets is not effectively performing the role entrusted to it by the Australian government on behalf of all Australians.
FOOT NOTE: This above was part of a submission into ASIC presented to the Senate in 2013. Still very relevant today
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