ASX probes hedge collusion
http://www.news.com.au/business/story/0,23636,23216433-462,00.html
By Glenda Korporaal and Adele Ferguson
February 15, 2008 01:00am
THE Australian Securities Exchange yesterday signalled that it would investigate allegations that hedge funds are colluding to push down the shares of major Australian companies.
ASX head of supervision Eric Mayne yesterday said he would be investigating market rumours that hedge funds were working together in packs to target specific companies.
Mr Mayne also signalled that the ASX was keen for more regulation of the increasingly common practice of short-selling in the market, and would be looking at greater regulation of company directors who had big margin loans against their shares.
Mr Mayne's comments come after great volatility in the share market in recent months.
Some companies have complained that they have been victims of concerted action by hedge funds to push down their share prices, allowing the funds to make money by buying them back at artificially low levels.
"Anecdotally, that has been what has been suggested to me - that they are doing just that," Mr Mayne told a press conference yesterday. "As a consequence, we will be investigating it."
But one hedge fund manager lashed out at Mr Mayne's comments last night. "It's all crap. The basic point is that short-selling contributes to market efficiency," he said.
"For every hedge fund that is short-selling, there will be another hedge fund that will be buying because they believe it's been over-sold.
"If they (ASX) try to crack down on it (short-selling) they will actually destroy market efficiency. Hedge funds are notthis collusive mob where they all get together and follow one strategy."
The ASX, which yesterday reported a strong 35 per cent rise in net profit to $187.4 million for the six months to the end of December on the back of record market trading, defended itself from criticism that it had mishandled the recent problems with stock broker Tricom.
Chief executive Robert Elstone insisted the ASX still had the confidence of the market.
He said expectations that the ASX would give a "ball by ball" public commentary when it was handling issues such as Tricom's inability to meet its market settlement obligations last month were misplaced.
Mr Elstone said the ASX was not immune to criticism but said he believed investors had confidence that it could handle the pressures of operating and supervising the share and futures markets in the current volatile environment.
He rejected heavy criticism that the exchange should not be involved in providing an official market for the highly risky contracts for difference (CFDs).
Also known as "spread betting", CFDs allow investors to borrow money to bet on the short-term movement of share prices, exposing investors to potentially unlimited losses if the market moves against them.
The Australian Securities and Investments Commission has warned investors in CFDs that they are "effectively gambling a much larger amount of money than if they went to the casino or a race track".
Mr Mayne said the fact that the ASX had taken over the role of trading CFDs late last year should give investors some comfort. The market was now being properly supervised, instead of the unregulated off-market trading in CFDs that had been going on in the past.
Mr Elstone also signalled that the ASX was looking at introducing a "second generation" of CFDs, which would be listed in the first six months of next year.
He said ASIC supported the idea of the ASX offering CFD products, which were also being offered by stock markets around the world, including the London Stock Market.
But the ASX executives did call for more regulation to force the disclosure of the increasing degree of short-selling in the Australian share market.
They said this was an area that could be more closely supervised by ASIC if it were given greater control over the regulation of stock brokers. Mr Elstone called on the federal Government to set up an inquiry to look at new laws and regulations needed to cope with massive changes in financial markets in Australia in the decade since the Wallis inquiry.
The controversy comes amid some of the most volatile trading seen on the Australian share market. January had more than double the level of turnover as the same month last year.
The record turnover on the market saw the ASX yesterday report a 35 per cent rise in net profit for the six months to the end of December to $187.4 million - slightly above market expectations. But concerns about the future outlook for the market and new stock market listings saw investors mark the ASX's shares down by 34c to close at $45.13.
Analysts said the possibility of fewer new share market listings later this year, the big rebates the ASX was now giving to brokers, and concerns that the big cost savings from the merger of the ASX and the SFE were for a top-20 stock is extraordinary," said Allan Furlong, manager of private client services at stockbroker Joseph Palmer & Sons.
Mr Furlong said the recent volatility was not related to the fundamentals of the market, with hedge funds likely to be behind some of the big moves.
"I'm looking through the fabric of the market and the sort of volatility that is going on ... it's not my clients selling bank shares, because I'm telling them to hold long-term," he said.
Banking stocks regained some ground yesterday with NAB moving 3.3 per cent higher while the ANZ gained 2.7 per cent. The Commonwealth closed 1.8 per cent ahead.
"Fundamentally there are some good stocks that are on sale right now," Mr Furlong said.
"We may not pick the very bottom but why would you not buy the Commonwealth Bank or NAB on the yields they're displaying and put them away?
"Even if we have six months where the market is flat, you still know that your super fund is going to be doing all right in three years' time."
Bit fn late