Is it just me or does this trading of tiny unmarketable parcels at prices consistently below the last trade look like blatant manipulation of the market's price discovery mechanism ?
Now I know this happens every day and on loads of different stocks and I know its what bots often do but rather than just accept it as I usually do I ask the question, is it actually within the guidelines, ie is it truly legal ?
The argument that is usually put forward is that bot owners (algorithmic traders) are allowed to trade in unmarketable parcels in order to break down larger trades into parcels that won't move the market. Now while I can see an argument for this if a major shareholder wanted to move tens of millions of shares, it wouldn't be great to see them dump it in a single large sell order. But given that hundreds of thousands of us normal retail holders have to trade in marketable parcels, how can algos genuinely argue that trading in marketable parcels is unfair to them. If orders placed by us mere mortals doesn't unreasonably move the market then why should orders placed by algos of a similar size ? Seems odd that they need to be able to trade in parcels that are often 100th the size of what us little people trade in doesn't it ?
Given that one of the founding tenets for the creation of stock markets is a fair, reasonable and transparent price discovery process, surely allowing select parties to drip feed value insignificant orders into the market can't be in keeping with said tenets.
The old saying that “it’s not enough to just uphold the law, one must be seen to be holding the law in order that the public maintains faith in it" is particularly relevant here. While algos may put forward the argument that they trade this way so as not to affect the market, I believe that the overwhelming conclusion reached by the majority of participants in the market is that the sole purpose of the majority of these trades is for nothing but to influence the market.
Lets looks at examples orders placed on SSN today for illustration purposes only. Loads of trades go through at 11.5c then suddenly a single tiny unmarketable trade goes through to bring the price down 5% to 11c. More real trades go through at 11.5c so the bot puts in another tiny order to sell 771 shares at 11c. Now the value of these trades is a mere $84 give or take. Given the depth in the stock how can algos argue that trading in marketable parcels is going to unfairly influence the market? It seems to me that the proliferation of these tiny order does more to move the market than the occasional marketable parcel ever would. As so many fundamentals of the market are based in the single share price figure which is the last trade price (irrespective of the size of the last trade) it would seem that influencing this data is very likely to have cascading impacts and ultimately affect the market.
If that isn't blatant enough, there has been no trading at all today on the options. No half completed trades, nothing. Somebody has added a sell order for 50 options below the last trade price but just high enough not to actually sell into the buy queue. The total value of this order is $4.75. This order wasn’t there this morning and has specifically been added over lunch. It goes without saying that there is more than maple market depth on the buy side for this seller to just sell this tiny parcel into the buy queue currently at 9.3c but they chose not to. The total difference to the proceeds of the sale if they just sold into the buy queue would have been 10c. Yes, that a 10c difference on the total proceeds of the order. Its hard to believe that such orders do anything except to encourage a new lower line in the sand for sellers in the sell queue and set a new artifically lower price, thus influencing market perception.
The order is so small that an average punter can’t actually consider buying it without suffering the risk that they pay $30 brokerage for $4.75 worth of stock and the balance of their order just sits there unfilled. Does this seem reasonable ? Wasn’t this one of the reasons that marketable parcel rules were actually implemented in the first place ?
Now as always these comments are made without behind the scenes knowledge of who actually placed each order and therefore these specific orders may have other legitimate explanations however I use them to illustrate what appears to be a common pattern that we see in today's markets.
The questions seriously needs to be asked "Are all participants obeying the rules ?". I believe most of us just accept that it happens and take comfort in the knowledge that since we don't need to sell right now such practices may occasionally provide us opportunities to take advantage of artificially depressed prices. This is of course true until the day comes that we do actually want or need to sell. Surely that day will eventually come for all of us on every stock that we own. This leads me to question whether this practice actually has a material impact on all of us over the long term.
The above are my observations and opinions only. There is no intent to make accusations but rather to question if there is actually something profoundly wrong with some aspect of how the market now works. This is particularly noticeable on stock like SSN and I am of the belief that SSN shareholders may not necessarily have a truly fair market place in which to trade their stock. I am not a traders advocate but rather have concerns for investors who for whatever reason decide to sell. Is there truly a fair and transparent market for them to do so ?
Now I know this is going to bore some people to death but I believe there are sound legal impediments for such practices which are supposed to be enforced by market surveillance. Its not fluffy ASX listing rules or anything like that, its real laws under the corporations act. Here are a few examples of why such trades appear out of place:
Corporations Act CA s1041A - Price Manipulation
A person must not take part in, or carry out (whether directly or indirectly and whether in this jurisdiction or elsewhere): (a) a transaction that has or is likely to have; or (b) 2 or more transactions that have or are likely to have; the effect of: (c) creating an artificial price for trading in financial products on a financial market operated in this jurisdiction; or (d) maintaining at a level that is artificial (whether or not it was previously artificial) a price for trading in financial products on a financial market operated in this jurisdiction.
CA s1041B(1) – False Trading and Market Rigging
A person must not do, or omit to do, an act (whether in this jurisdiction or elsewhere) if that act or omission has or is likely to have the effect of creating, or causing the creation of, a false or misleading appearance: (a) of active trading in financial products on a financial market operated in this jurisdiction; or (b) with respect to the market for, or the price for trading in, financial products on a financial market operated in this jurisdiction.
Now given that the corporations act would appear to outlaw placing of market orders which “create an artificial price” or “maintain at a level that is artificial” surely there are reasonable grounds to question any trade that is of an unmarketable parcel or of such a small denomination that when spread over a period of time it has the obvious impact of either “setting” or “maintaining” an artificial price. Moreover it appears obvious that many such orders result in the “creation of, a false or misleading appearance with respect to the market for, or the price for trading in, financial products”.
Now are we really wrong to complain about these trades when the corporations act appears to forbid them ? I’m sure legal departments of many a firm can and have constructed arguments to explain some other purpose for these trades and allow the practice to not only continue but to proliferate. It appears that even if through some loophole the law is being upheld, there is absolutely no illusion that it is “seen to be upheld”. What's the point of having such rules if we can’t even have so much as the perception that everybody is subject to them ?
SSN Price at posting:
11.0¢ Sentiment: Buy Disclosure: Held
