Abnormal trading ‘ahead of 49% of N American deals’/Boom time for suspicious trades
By Victoria Kim in New York
Copyright The Financial Times Limited 2007
Published: August 6 2007 04:30 | Last updated: August 6 2007 04:30
The high-stakes worlds of casinos, hotels and banking are most susceptible to suspicious share trading ahead of big merger and acquisition announcements, according to analysis carried out by the Financial Times.
Abnormal share trading has been seen far more often ahead of large deals in these industries than in others such as insurance or telecoms, suggesting they may be more vulnerable to insider trading.
The FT analysis shows that 80 per cent of hotel and casino M&A deals since 2003 saw abnormal trading in the days leading up to an announcement. The banking industry comes second with 52 per cent of deals in the same period showing suspicious share movements.
The FT examined trading data for the top 100 US and Canadian deals since 2003 collected by Measuredmarkets, a Toronto research firm that uses a weighted average based on volume, price and number of trades to flag unusual trading patterns.
The survey found suspicious trading occurred ahead of 49 per cent of all North American deals.
Deals in the telecoms industry showed the lowest level of suspicious trading at 33 per cent, followed by media at 38 per cent and insurance 43 per cent.
While the suspicious moves detected by the Measuredmarkets data may indicate insider trading, the data is not proof that improper trading occurred, nor does it flag every insider trade.
Insider trading may vary from sector to sector because non-public information may yield higher returns in some industries than it does in others, says Henry Hu, a corporate and securities law professor at the University of Texas.
The variation by sector may also be due to hedge funds preferring certain types of stocks over others, said John Coffee, a Columbia University law professor. Mr Coffee, who has testified on hedge funds before the US congress, said some funds may be more willing than other investors to take the risk of trading on improperly obtained inside information.
Measuredmarkets does not track call or put options, which are often used in insider trading. On Friday, the US Securities and Exchange Commission filed a civil complaint against Taher Suterwalla of London, alleging he used call options purchased through a Swiss bank to trade ahead of Petco Animal Supply’s announcement it would be acquired by two private equity firms. No trial date has been set.
Though Measuredmarkets flagged 49 deals for suspicious trading, only a handful have been the subject of civil or criminal cases. It is often hard to link specific trades to improper leaks.
Sometimes the Measuredmarkets data appears spot on. The firm flagged April 16 and 17 for deviant trading in Dow Jones shares when the prices rose 4.8 per cent. On April 30, News Corp made public its $60-a-share bid. In May, the US Securities and Exchange Commission charged a Hong Kong couple with insider trading, alleging they improperly purchased 415,000 Dow Jones shares between April 13 and 30.
The SEC declined to comment on the FT survey.
But Rick Ketchum, chief of regulation for the New York Stock Exchange, said: “We are continually working to improve and strengthen our system of monitoring trades in NYSE-listed securities, options, bonds, ETFs, and other products. Our surveillance systems allow us to review and investigate anomalous patterns that may constitute insider trading and market manipulation.”
Additional reporting by Brooke Masters
Boom time for suspicious trades
By Victoria Kim and Brooke Masters in New York
Copyright The Financial Times Limited 2007
Published: August 5 2007 22:03 | Last updated: August 5 2007 22:03
Suspicious trading ahead of large US mergers and acquisitions has risen four-fold in the past five years, suggesting that the recent M&A boom might have sparked an even bigger increase in insider trading, according to analysis commissioned by the Financial Times.
Almost 60 per cent of the 27 big deals announced in North America so far this year were preceded by unexplained spikes in trading in the stock of the target company, according to a review of data by Measuredmarkets, a Toronto research firm. This compares with 14 per cent for the seven largest deals announced in 2003.
Though the data highlight only suspicious transactions, rather than identifying particular trades that could be the basis for insider trading charges, the sharp rise will add to concerns that Wall Street insiders are illegally benefiting at the expense of ordinary investors.
Regulators and prosecutors have expressed increasing concern at the apparent growth in insider trading, suggesting it could ultimately undermine public confidence in the financial markets.
Just this year, former employees of Credit Suisse, Morgan Stanley and UBS have faced criminal insider trading charges, and the US Securities and Exchange Commission recently warned David Li, a member of the board of Dow Jones, that he might face civil charges in connection with suspicious trading ahead of News Corp’s bid for the financial information group.
The growing number of hedge funds could be a factor behind increased suspicious trading as funds scramble for information that will provide them with an edge.
“You’re in a world where there is much more competition. You need to trade quicker, search for additional facts. Sometimes that induces illegal behaviour,” said John Coffee, a Columbia University law professor. “Human nature has not changed since 2003, but the predominance of hedge funds has.”
Measuredmarkets monitors US and Canadian stock exchanges for sudden changes in trading behaviour. The firm uses a weighted measure that takes into account changes in a stock’s price, trade volume and number of trades, and compares it with up to four years of trading history to identify aberrations.
Measuredmarkets reviewed trading data for the 100 largest deals announced in the past five years. Days flagged as suspicious by Measuredmarkets were matched with media databases to exclude days on which news reports appeared to explain the deviant trading.
The Financial Times also used a measure 10 times more conservative than the threshold used by Measuredmarkets to account for random fluctuations.
The SEC does not track overall levels of suspicious trading, but the UK’s Financial Services Authority this year said it found no significant increase in suspicious trading in the London stock market between 2000 and 2005. Abnormal price movements occurred before 23.7 per cent of all merger and acquisition deals in 2005, compared to 24 per cent in 2000, it found.