Is it unusual for the share price of companies to move up one may ask? Most would answer no, and to most investors, a rising share price is desirable. However, suspicions may arise depending on the timing of those stock price increases.
As the markets awoke to news that
the Securities and Exchange Commission of Zimbabwe (SECZ) was conducting
investigations of a few stocks after those counters experienced considerable
gains in their prices on a single day`s trading. Fidelity (Assurance and
Insurance) rose by around 53% to close at US 13.01 cents on the 30th
of December 2013. Similarly Zimplow (Industrial and Engineering) saw its stock
rise by 33% at close of trading on the same day. Interestingly, for both of the
counters, those gains in share price were on the back of relatively low volumes
of trades of just 1000 and 96 000 shares respectively.
A study of nearly 10 000 stocks
on the New York Stock Exchange found out that on the final trading day of each
quarter since 2004, there was a significant increase in the number of counters
that saw their price firm sharply, only to plummet substantially during the
course of the following trading days thereafter.
Most financial analysts explain this
phenomenon, to the fact that fund managers would have employed strategies to
enhance the appearance of their fund or portfolio performance. This is usually done
toward year or quarter end, a time when performance reports and list of fund
holdings are usually sent to clients. As a result of this window dressing which
can be known in financial jargon either as “marking the close” or “portfolio
pumping”, the performance results of funds are made to look pretty albeit
deceptively so. This would ensure the portfolio funds earn more in the way of
management fees.
Fund managers typically drive up
share prices through aggressively bidding for more shares of stocks they
already own and in so doing causing a spike in their prices which will inflate
the value of their existing portfolio. On the other hand, they may sell loss
making stocks right toward the end of their reporting season to clients
Window dressing mainly is carried
out in thinly traded stocks whose share prices will tend to fluctuate
considerably. In such cases, a fund that
has a substantial holding in a relatively small counter can drive up the price
of that counter by purchasing as little as 100 shares of that stock at a
premium round about the closing moments of year or quarter end trading. By so
doing, the value of the Funds under Management (FUM) will be go up and the
money manager will realise higher fees, as well as other potential clients.
Ordinarily, any increase in the
price of a stock should have underlying fundamentals. It follows therefore that
any sudden spike in share prices that is not substantiated by an underlying
factor in the market fundamentals of a company immediately draws suspicion. However,
for the several counters on the Zimbabwean Stock Exchange (ZSE) that saw their
share prices rise significantly in one day, there is barely any information
that relates to their company prospects that could have justified the sharp
increase in their prices. When one considers the moderately low volumes traded
as well as the timing of those trades, one cannot but question if it was a
typical case of window dressing by fund managers in the local market.
As the SECZ tries to investigate
whether the said matter was a case of window dressing or not, it is not
immediately conceivable how they can prove this. The mechanics of the stock
market are such that there are relationships between multiple traders across multiple
securities and it is not easy to match trades to the traders who made them. Furthermore,
as trading on the local bourse is still manual; it would be complex to prove
window dressing at least without the SECZ having to go through confidential
records and getting assistance of the stockbrokers who are involved in trading.
The question therefore arises as
to whether automation of the local exchange would help curb instances of window
dressing. In more developed financial
markets information about companies and their prospect is readily available
electronically and this improves transparency and informed decision making. For
example, in South Africa, the Johannesburg Stock Exchange has the JSE news
service (SENS) which frequently churns out market information on a daily basis.
This would help in analysing whether an increase in a stock`s share price is
justified by information about the company that would increase investor
sentiment toward that company`s future prospects.
Limit up-limit down price circuit
breaker mechanisms are a feature of most automated trading systems. These are
designed in a way to prevent sudden and volatile share price movements and
prevent stock trades from occurring
outside pre-specified price bands by pausing trades altogether when there is a
marked decline or rise in the share price. As a result order and transparency
in the markets is promoted. This seems to make a case for the forthwith
automation of the local bourse to increase efficiency and curb incidences of
window dressing.
That being said, a share price
increase generally affects everyone who holds that stock. Therefore as a result
of that rally witnessed on Monday the 30th, investors with holdings in ABC
holdings (Banking & Finance), Fidelity and Zimplow enjoyed as the stocks
rose 18%, 53% and 33% respectively. It remains to be seen whether the share
prices will trail significantly in the coming days after the rally they
experienced.
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