Excellent post Maaze. Hopefully everyone will get in on this,...

Excellent post Maaze. Hopefully everyone will get in on this, because we are really being done over.

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GroundZero, here is the context of a complaint I made to ASIC a week ago, they have not acknowledged it yet, but we must keep up the pressure. I have made several complaints to ASX regarding CDU and get a generic reply within an hour or two. That just means that they do not investigate, only send out the reply which states "we have investigated the company and find nothing"

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Commencing prior to 01/01/2010, but of increasing frequency and volume, there appears to be strong evidence to suggest that Algorithmic Trading is being used to manipulate the stock price of the mining explorer company CUDECO (ASX CDU)
Numerous complaints have been sent to ASX and these complaints appear to have been ignored or replied to with a generic letter stating that trading in the company has been investigated and no incident found.
From the speed of the replies and the content of the Generic letter, it could be presumed the ASX had not bothered to investigate the incidents as described by the complainants, preferring instead to class it as an Algorithmic Trading Complaint rather than a Price Manipulation complaint
It is well noted that ASX stakeholders are the operators of and beneficiary to Algorithmic trading, and as such, it is very possible that the ASX has no great interest in carrying out investigations into activities from which it may receive substantial benefits.
In the case of CuDeco, trading patterns available from the daily Course of Sales on a minute-by-minute basis appear to indicate the practice of "Churning", where a company is able to stack the Buy and Sell sides and proceed to sell shares to itself in very small quantities in a manner which causes a significant price reduction, and at the same time avoiding* other genuine orders.
*(Avoidance of genuine orders is made possible on the trading platform where the Algorithmic Trading parameters are set to withdraw from a price level when an incoming order from another buyer/seller is sensed. This millisecond assessment is made by the Algorithmic trading computer which withdraws the stock from sale and moves it to a higher or lower price.)
As the practice of churning is an identified illegal activity, the companies wishing to manipulate the price in this manner can possibly create two or more entities at arms-length and transact 'Buy and Sell' orders exclusively between these entities (i.e. themselves) and in so doing effectively manipulate the share price according to predetermined price objectives. Such arrangements completely side step any illegality of these entities selling directly to themselves. But selling to themselves, albeit through related but Arms Length entities, is exactly what I believe to be happening.
Such arrangements are often cunningly disguised by shareholdings that are registered in nominee accounts so that it is not immediately obvious what is going on from examining the register of the company so targeted. End ownership of Nominee accounts must be analyzed to reveal the full picture.
By way of example in the case of CuDeco, records for the trading of one broking house, (e.g.) Deutche Bank for instance, can be used to gain an appreciation of what is going on under the noses of ASX regulators. From the broker figures made available to me, it appears that the trading by Deutsche Bank shows a gross loss for their trades over the 2010 trading period:
The figures below of course could be better validated by the information systems available to your Officers, but if I am correct in my arithmetic and I believe that I am, an extremely worrisome picture is emerging for Cudeco share holders:
Deutsche Bank Trades - Jan 1st 2010 up until 2/3/10:
Value of All Transactions: $94.29 million
Net Shares Purchased: 278000
Total Number of Shares Purchased: 9898000
Number of Buy Transactions: 20319
Average Purchase Price: $4.89
Number of Shares Sold: 9620000
Number of Sell transactions: 18451
Average Selling Price: $4.76
Total Trades: 38760
Of the shares bought and then sold during the period, the net loss is represented by:
9620000 *($4.89 - $4.76) which equates to $1.25 million.
Of the shares still retained, at a market price of say $4.03 back at the start of March, Deutsche were carrying paper losses of:
278000 *($4.89 - $4.03) or $239,080.
All up, the Deutsche Bank involvement with a turnover of $94.29 million had incurred a paper loss and a real loss totaling around $1.5 million. (2/3/10)
While the figures exampled above would be impacted by the inclusion of current share price, a complete analysis must include up to date trading figures as well as current price levels. Inclusion of all data in any analysis will no doubt show an even greater loss.
Deutsche Bank is not singular in this activity, and similar figures can be provided for other brokers known to have acted in the past for the company named towards the end of this complaint
It does raise questions like, What exactly is going on here? and Why is algorithmic price suppression tolerated by ASX market regulators?
There is also the issue that it is grossly inappropriate for organizations like the ASX to be allowed to regulate themselves when there are financial benefits available to them, by simply looking away and doing nothing. This manipulative use of trading algorithms is a case in point.
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As you are aware, the defined purpose of Algorithmic trading is for a broker to accumulate substantial numbers of shares for a buyer by having minimum effect on the Share Price. When a comparison is made between Net Shares Purchased (240,000), Value of all Transactions ($94,290,000) and Total Number of Shares Purchased (9,898,000) (while incurring a loss of $1.5m) it is clear that the purpose of this activity is other than accumulation of large numbers of shares.
However, the practice of "Churning" in order to manipulate the price negatively is a legal grey area if the buyer and seller are at "arms length" - the purpose of this practice is to psychologically impact on the retail shareholder by creating a false baseline from which to launch a takeover of the company. This baseline is known as (e.g.) "90 DAY VWAP" where a Company may, in the Takeover document, offer:
"$XX per share, a generous 40% premium over the 90-DAY VWAP"
The purpose of this activity is clear: Where the Takeover company may have been able to manipulate the share price from (say) $5 to (say) $3.50 and produce a 90 day VWAP of $4.00 at a cost of $X, 000,000, the retail shareholder capitulation of acceptance of the manipulated share price VWAP+40% results in a massive profit for the company over what otherwise may have been the case.
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The trading that takes place in CuDeco (CDU) on a daily basis is extremely suspicious.
Could it be that the company is actually being targeted and being prepared for a low ball takeover? If algorithmic trading has in fact assisted in suppressing the share price, and there are strong arguments to say that it has, then steps need to be taken to ensure that share holders are not continually duped in this way. I have brought his matter to the notice of ASIC because if illegal activity is taking place in the trading of Cudeco shares the system can start taking the necessary steps from preventing share holder wealth being stolen.
In the coming weeks it would be expected that any illegal activity will become more clearly defined as any company wishing to make the hostile takeover may ramp up its activities in this regard hopefully now under the watchful eyes of ASIC, but if not, the trading data for CDU for the YTD need to be analyzed thoroughly to identify churning and price manipulation.
In the case of Deutsche Bank trading in Cudeco shares, it is somewhat curious that they have acted for Xstrata in the past such as in the takeover of Falconbridge of Canada. As have broking house JP Morgan who also appears to churn Cudeco shares in the market also. As an aside, it is interesting that Xstrata have a copper mine in Ernest Henry that is towards the end of its use-by date which is in close proximity of Cudecos Rocklands project. And it is even more interesting that Xstrata itself has mining tenements surrounding Cudeco. You would think that if Xstrata was to see Cudeco as a desirable acquisition to supplement its declining portfolio in regard to copper projects, then they would have an incentive to employ entities acting on their behalf to distort the true value of Cudeco by the misuse of trading algorithms to achieve predefined price objectives.
With all of the above in mind I refer you to ASX report: Algorithmic Trading and Market Access Arrangements where Algorithmic Trading is defined: For the purposes of the ASX Review, algorithmic trading is defined as computer generated trading activity whose parameters are determined by strict adherence to a predetermined set of rules aimed at delivering specific execution outcomes.
Strict adherence to a predetermined set of rules is the operative function of the definition:
One must ask therefore if Price Manipulation is allowable within that set of rules.
By far, the greater majority of retail investors feel disadvantaged by Algorithmic Trading as they are generally unable to compete with sophisticated computer programs which are known to cost millions of dollars. That is not the purpose of this complaint. The purpose is to alert you to the irregularities in the system, specifically of intended price manipulation, designed to occur in the name of Algorithmic Trading and which is claimed to be an innocent by-product of that form of trading.
Referring again to the ASX report:
A significant proportion of algorithmic trading (both buy and sell side) is conducted for market impact minimization, arbitrage, asset allocation, and many other traditional trading strategies. However, a small number of trading algorithms in use internationally employ strategies that, if they became widely used in Australia, would raise questions about their impact on the supervision of the local equity market and on non-algorithmic market users (particularly retail investors). The ASX Review noted that regulators in other jurisdictions, where the evolution of algorithmic trading is more advanced than in
Australia, are only just beginning to understand and address the emerging issues that these algorithms raise.
After considered observation of the activities referred to in the body of this complaint, and with reference in particular to, but not confined to, CuDeco, it must be noted that the claim: the evolution of algorithmic trading (overseas) is more advanced than in Australia does not give any consideration whatsoever to the almost instant evolution world-wide of all computer based activities, and any claim to the contrary could be viewed as a blind designed to mislead the reader.
As a concerned retail shareholder, I would be only too pleased to assist you with any investigations you decide to conduct in this matter and I look forward to reading your response and any suggestions you may have, to take this matter further. To date, investigation into Algorithmic trading has only solicited the opinions of those whom it benefits and not from those whom it adversely affects.
Of course the potential problem as it relates to Cudeco according to the background I have provided has widespread implications for all stocks on the ASX. Something must be done about the illegal use of trading algorithms urgently before we see massive retail share holder wealth destroyed by the abuse of algorithmic trading by the larger players in the market.
Cudeco is just one example and the practice is so widespread that the foregoing will apply to any number of companies merely by the substitution of the name in the text.
Retail investing in Australia is a very large industry in which tens of thousands of people are involved (Cudeco alone appears to have 7 or 8,000 retail investor accounts on their registry). This industry is a major source of tax revenue for the government, but even more importantly it is an industry which employs thousands of not otherwise employable persons, as by far the greater majority of participants are approaching or beyond retirement age. The illegal activities referred to above impact enormously on the retail participants by way of giving untenable advantage to the perpetrators of the action, and if allowed to continue along the present path, will, in time, destroy this employment sector, ultimately forcing independent retirees into the social security system, placing a greater burden on already badly mismanaged federal and state funds and at the same time losing a higher range of tax revenue from that sector of the industry.