eddie mabo v asx...

Time to drag out an old whipping horse of mine...

Shorting...

When I think of shorting and all its manifestations, I can't help but reflect on the David and Goliath efforts of Eddie Mabo...who took on the state and won a major victory for his people.

Seems the state was in breach of its own constitution...but didn't even know it!

So...I am wondering if it might be the time for a finaicial version of Eddie to stand up agaisnt the ASX and and ASIC...and virtually everyone who is in breach of the numerous laws governing our markets?

During the GFC, markets world-wide banned the practice of shorting, in their own words (more or less) ” to ensure a fair and orderly market...”

The inference here of course is that shorting, by and large, must be detrimental to “fair and orderly markets”...else why the need to ban it?

I think the key to the decision at the time however was that everyone was being affected by shorting...and losing money...rather than just the retail end of the market!

So I guess it goes...shorting is OK as long as it is only the small end of town being reamed.

Anyway, it becomes obvious from this little glimpse into the real world of global market transactions that shorting has become far more than just a tool for genuine “price discovery”, but has perhaps more recently morphed into a tool (as part of an organised strategy) of “price dictation”...

The reason I raise Eddie Mabo as a reference here is not a flippant attention grabber...in my view the “System” itself may be in breach of many of its own rules and it may need a high-court ruling to determine this.

I am talking about rules against market manipulation, rules against generating false markets...and rules about related-party transactions...all of which are RULES DESGINED TO MAINTAIN “FAIR AND ORDERLY MARKETS”.

It is my belief all of these prohibited actions take place on our markets numerous times daily...

Further, there appears to be a caste system built into the ASX via all manner of favouritism towards certain groups over others...all based it appears on who is prepared to pay the most to the ASX?

A cynic might suggest there has been no consideration given to market integrity here...just consideration for the highest bidder?

Among a list of abhorrent practices that have crept into our financial system, I am particularly concerned about any form of “front-running” of orders by programmes hooked straight into the ASX’s main server...programmes that can look at my order and transact against that order for personal gain even before it has executed on the ASX. It may be a micro-second of difference, but my transactions...and your transactions...should not be flagged to anyone prior to actually transacting on the ASX...PERIOD!

The release of this information to others before it has happened, even if only a micro-second prior, is in direct conflict with all manner of security, privacy and financial concerns.

A micro-second after the order is fine...but not a micro-second before...big difference!

Imagine getting the lotto numbers a micro-second before everyone else...but more importantly, being able to buy a ticket with the information?

In the world of cheap-unit-price-per-transaction HFT trading...the capacity to front-run orders for half a pip is not all that unlike getting the lotto numbers early...it’s akin to free money!

Why else would someone pay millions to have just 1 metre of cable between their “black box” computer and the ASX’s main server, instead of say 10 metres of cable...or god forbid, a mind staggeringly slow 1milli-second delay to the ASX data line via a Neanderthal paced (comparatively) network link...unless they stand to make considerably more?

The fact such a concept can even exist in the ASX at all shows how far the system has well and truly lost its way...it has become inherently corrupt...and it doesn’t even know it!

I personally do not have a problem with automated trading, be it algorithmic or otherwise, if it is used as intended...and regulated accordingly. For the most part automatic systems reduce the costs of having real-life traders sitting at desks doing mindless trades over and over to achieve stated objectives; such as achieving the days VWAP, or breaking down large orders into smaller, more efficient sized parcels relative to their market...

I get this bit...and realise these are all pretty harmless activities, even if they might be confusing to some.

Sadly however, this is NOT the only use for HFT and algorithmic trading on the ASX...and when combined with a whole raft of “back-office strategies and antics” becomes a real problem for the ASX and the wider Australian market.

I would go so far as to say it is probably a matter now for ASIO to investigate the vulnerability and negative impact on our markets of such practices, particularly due to the risk of manipulation from foreign concerns and subsequent impact in relation to;

1. Capacity of our markets to flourish in general, particularly in respect to overseas peers;

2. Detrimental impact of falsely depressed market valuations in relation to acquisitions by foreign entities, placements and or JV arrangements;

3. Reduced value of the nation’s collective superannuation and non-superannuation retirement pool and subsequent pressures on self-funded retirement;

4. Reduced ATO tax pool due to lower PE’s and Company valuations, due to subsequent lower profits for shareholders...in addition to the negative down-stream effect on Company growth;

5. Re-direction of the wealth of ASX listed entities into the hands of select major corporations, many of whom are foreign owned, helped mostly by falsely suppressed pricing regimes;

6. Stripping of asset value (shareholder value) of small shareholders via unduly suppressed prices and increased dilution (ie cheap placements at falsely depressed prices to the detriment of mums & dad investors);

7. Share-price gouging practices enhanced by the capacity to dictate on-market pricing.

The list goes on...

I started out this post talking about short selling...and whilst some will assume I have side-tracked with references to HFT, algorithmic trading and need for ASIO intervention...it is important to note all of these are indelibly linked to short-selling.

The most common, somewhat motherly response from supporters of short selling is that any shares short-sold into the market must be bought back at some point...thereby reversing the negative impact of the initial short-sale...

Bzzzzzzzzzzzzzt...wrong!

One of the most insidious acts perpetrated against all who own shares in ASX listed companies is the practice of pre-emptive short selling...and short selling...and more short selling...in fact as much selling as might be needed to overwhelm a particular stock (all stocks can be overwhelmed if enough selling stock appears).

This can even be at the behest of the Company in question, perhaps in collusion with a particular broker...or backer...whereby the Company guarantees to write as much new scrip as is required to sell...and keep selling...the price down to a set level, at which point a placement is “put away” to the detriment of all shareholders other than those taking the placement.

Then we have the hostile version of the above...where it may be known for example that a Company needs to raise funds...and the above scenario is played out in a hostile environment. The end result of which is the Company doesn’t really have a choice but to raise funds at falsely depressed prices...once again replacing the short-sold shares off-market via a placement instead of forcing the sellers to buy them back on-market.

Another version of the hostile short-selling scenario ends in a cheap takeover of the target entity.

In all the above cases the negative impact of shorting is never reversed...thereby rendering its initial impact permanent.

Shorting can also target companies...or even individuals...that might have various loan and/or price linked covenants that trigger should the price fall to a certain levels...once again resulting in new stock being written off-market (ie exploding convertible notes, loan guarantees, etc)...but in this example can result in significant dilution of the register in spite of NO new cash being raised.

Regardless of the motive...the execution is usually the same...sell...and sell...and sell some more...with the view to forcing the stock price down. Borrowed stock, naked short-sold stock, or even “promised” stock (carefully crafted legally)...and of course your good old fully owned legitimate stock...doesn’t matter as long as it is sold. If the stock should start to rise, they cap as many false sell lines in the queue as possible, so all and sundry are clearly aware they will probably get cheaper prices if they wait a little longer...so even in the face of an obviously manipulated push downwards...not many front up to meet them face on for the simple fact they know if they wait they too will get them cheaper.

Which they usually do.

Finally...once the short sting is mostly complete, it’s always helpful if the odd negative report should appear about the target stock...this is what the media is for...stock downgrades and/or sell recommendations...we have all seen them. These help with the final stage of the sting, which is NOT to buy the stock back on market and thereby reverse the impact of the selling, but to take a placement in the said stock at a deep discount to the last traded price of the now deeply depressed prices.

To add insult to injury, the broker usually gets a 5% fee for their efforts...

At the end of the day...in spite of the protestations of those in support of shorting, in many many cases the “negative impact” of the short-selling is never reversed...and the target companies are forever inflicted with a significantly expanded share register thanks to the additional dilution that resulted from raising funds at say $0.50 instead of say $1.50?

Someone profited from the transaction...but not the shareholders who collectively now own less of the stock than they did before...or have had to pay more to maintain their percentage ownership (increasing their net outlay)...also, the upside pricing levels of their stock is less than it was before due to the additional shares on issue.

Thousands of shareholders have lost money and future profit margins have been reduced per share...all so a few could profit from what amounts to little more than a short swing trade.

Frankly, given the behaviour of some so-called “professionals" in the market, it is also not a stretch to imagine some ASX companies may even collude with various shorting groups in this regard...if nothing else to help remove some of the risk that might otherwise be associated with an unsupported shorting sting.

For a fee...and some time spent in the trough perhaps?

Further...the whole process is significantly enhanced in favour of those instigating shorting stings if different groups act concurrently...to hunt in packs so to speak...perhaps even executing related transactions over and over to help their cause?

Perhaps under the guise of providing “liquidity”...or acting as “market makers”...or even “providing stability”...lol

???

These are all well used terms in the market...in fact the ASX uses phrases such as these in support of the use of HFT’s and algorithmic trading...but I would love to know how any of these terms can be seen as describing anything other than false or misleading market conduct?

The recent high-court ruling on these very antics may well provide the platform we need for the financial version of an Eddie Mabo to finally stand up...and take on the might of the “system” on behalf of all shareholders?

And in this regard, frankly I am sick to death of the indignant rants of those who are clearly entrenched in this process...deeply entrenched in the system...who come out in support of the whole grubby concept of selling something one does not own...or short-selling something that effectively belongs to someone else.

To profit at other peoples expense...with their own shares?

The argument is always that shorting allows 100% of the market the ability to set prices for a stock...what the?

What on earth gives anyone the idea they have any rights at all...period...to “set the price” of something they do not own?

Simple rule...If you want to own something then buy it and effect it that way...if you think it is too expensive though then don’t buy it and effect it that way...and finally, if you own something you think is expensive then sell it...and effect it that way!

Simple!

The above will generally ensure that basic rules of supply and demand will determine prices...not falsehoods and/or manufactured pricing regimes that create false markets from which to profit.

In spite of the above I do feel shorting still has a small place in our markets...mostly as a sort of relief-valve effect for severely over-priced stocks...but oly to be used within very strict guidelines and well monitored restrictions about and who, what and how many.

Shorting should not be allowed to hamper start-up and/or growth stocks in their early years...say prior to 5 concurrent years of profit...a bit like having rules on fish size and catch quotas, designed to ensure there will be a harvest next year.

I also feel most if not all stocks outside the ASX top 100 should be exempt...and possibly even anything outside the top 50, subject to a set of qualifying criterion.

Manipulation of our markets cannot be allowed to reduce a countries wealth, or capacity to grow...and to assume manipulation is not rampant at virtually every level of the market...and obvious in virtually every stock from time to time (or even daily)...is naive at best.

The “system” is virtually set up for it...but we are lead to believe self-regulation and responsible market participation...monitored by an entirely underfunded watchdog in ASIC (by design), are all that are needed to protect market integrity and by extension the collective wealth of the nation...

Are they serious?

The recent high-profile example of manipulation of the Libor Rate (London Interbank Offered Rate), with billions of dollars of profits and/or losses up for grabs for those generating as little as a 0.25% shift in rates...gives an indication of what is possible.

Most thought the GFC would act as a wake-up call to the flaws inherent in “the system”...but I think it has got worse, as many groups desperate to recoup losses push the envelope of what is fair and reasonable.

In my view, the integrity of the markets are at risk...real risk...and the “system” has become so inherently corrupt that most of those participating don’t even know...or perhaps have long stop caring?

On this matter...the whole principal of “raising funds from the market”, is of itself a borderline corrupt process...especially in the hands of some of the more unscrupulous brokers who are happy to wield all manner of antics...both on-market and off...including of course short-selling...to achieve their objectives.

How many shareholders reading this right now have sold shares to pay for an upcoming placement they have been "invited" to participate in? The future price may or may not have been disclosed (it usually is)...but it is virtually an unwritten law that it will be lower than your sell price...whatever that happens to be?

This is the absolute epitome of “raising money from the markets”

When you get a moment...look at the trading prior to virtually every placement announcement to the market this year...some stocks go up, then down...others go down, then down some more...but nearly all experience increased volume in the lead up, significantly out of character with the trading history of each respective stock.

It is especially prevalent in the small-caps.

Some will say this is an amazing coincidence...lol...amazing is right.

Under Section s 1041A of the Australian Corporations Act 2001, market manipulation is defined as transactions which create an artificial price or maintain an artificial price for a tradeable security.

I bet nearly 100% of people reading this post are thinking right now...”but, this happens every day on virtually every stock...”

I am pretty sure this is not an excuse, but none the less an interesting observation that takes me back to the original premise of this post...which is that the system itself is in breach of its own rules!

So...will the next Eddie Mabo please stand up...please stand up...

???

Cheers!