At the height of the GFC prominent legal house Allens published the following note to its clients.
“In March 2008, at about the same time as it focused on short selling, ASIC indicated a concern that some individuals were deliberately spreading false or misleading information about listed securities and that this was being done to provoke sales of securities and to reduce their market price. ASIC reminded market participants that spreading false rumours about listed securities without properly investigating the truth of the rumour can be a criminal offence under section 1041E of the Corporations Act (disseminating false or misleading information). ASIC indicated that, in conjunction with ASX, it would be vigilant in monitoring the market to ensure this type of behaviour is detected and prosecuted. ASIC also announced that it had commenced a formal investigation of certain conduct that could have involved spreading false or misleading rumours or predatory trading that could amount to market manipulation”.
That was 2008 and still today there are certainly enough commercial reasons to suspect that the creation and dissemination of false market rumours is still a part of everyday market life. The proliferation of hedge funds, the trading activities by many institutional funds and brokerage houses, plus the corporate advisory roles of protecting their clients share value or destabilising a target’s, are just some of the possible sources of rumours. In all cases there is a fee, a bonus or a commission to be gained and that is why it is easy to draw the conclusion that much covert rumourmongering probably still exists. The overt sign of this activity may well be seen in the constant and extraordinary market price volatility that endlessly and mindlessly occurs in the Australian share market.
In my view there is simple regulatory response to this activity. Require companies to openly, methodically and continuously update the market and their shareholders on their business performance. There would be no better way to do this than to require mandatory quarterly reporting of balance sheets and cash flows. The fact that so many Australian public companies treat their owners with disdain by neither reporting quarterly or indeed paying quarterly dividends is a black mark on the Australian capital market. Indeed it is hard to justify why a market worth some $1.5 trillion (about 3% of world equities) owned in the main by Australian super fund members whom collectively control over $1.8 trillion in assets, does not justify a strong regulatory reporting regime that is based on transparency and fairness.
Unfortunately it is apparent that our major fund managers, their hedge fund colleagues and brokers do not seek quarterly reporting because they access information through private briefings with companies. That is there competitive advantage over the public and they won’t give it up. Further the apparent indifference of both the parliament and the regulatory bureaucracy towards requiring quarterly financial information creates the unique environment for inside information to flow to a select few and false rumours to be easily started to create market price movement. As for the ASX which manages the share market it appears that it supports volatility and speculation as an essential part of its revenue generating ability. Its public stance on quarterly reporting is that it is too expensive for companies to comply.
I liken my suggestion for quarterly reporting and updates to the approach of fire authorities in meeting the challenge of an impending hot and dry season. Judicious burning may cost money but it will lesson the risk of a major fire and it certainly means that a fire outbreak can be managed. This analogy rings true in dealing and differentiating market information. More and better information from listed companies means that false rumours can be seen for what they are. Speculation can be thwarted by facts.
Think about this carefully – if the whole market received concise regular financial reports and company updates then the role of regulators would move from primarily investigating insider trading or rumourtraging, to one of regulating the integrity of public statements. What do you think would be easier to regulate and then to prosecute – actual statements or covert activities?
In my view rumourtraging is a bi-product of insider trading and both flourish because information does not flow consistently or fairly to the market. From my experience over many years in capital markets I do know that markets are constantly awash with information that is generally not publicly available. This information flows through companies, auditors, banks, corporate advisors, analysts, brokers and fund managers. Some of it will flow into parts of the market and affect the price of securities because in the main there is generally only a small fraction of a company’s shares that are trading at any given moment. Relatively small amounts of shares often move market prices because the bulk of a company’s shareholders do not participate in hyperactive trading.
Therefore very few people actually need to be involved in a market to create price movements and rumours need not travel far to create price volatility. Indeed sometimes it is price movements that lead to more rumours because of the wide perception (or is it fear) that prices must be moving for a reason. The perception that price movements single an oncoming event is a perception that is wrong as many times as it is right. However it is a perception based on mistrust of the market.
How often do you as a member of the investing public feel that a price of a security is falling or rising because you fear or suspect that someone knows more than you? That feeling probably flows from your underlying belief that the market is neither fair and or properly informed. Indeed I suspect this feeling is widespread and it flows from the ridiculous price volatility that we are seeing and the wide held perception of a lack of timely regulatory enforcement. This combined with the hyperactivity of computing trading, hedge fund shorting and market arbitrage activities has taken the share market further away from the true purpose of the share market – where people can fairly conduct investment or where companies can source patient capital.