Are Activists Being Sabotaged by Their Brokers?
Activist investors have tried hard to keep their trades secret and prevent others from piggybacking off their best ideas.
Now, an academic paper released online this week highlights a potential risk for them: brokers leaking their confidential trades.
The research suggests that brokers who execute trades on behalf of activist investors may be tipping off other clients about those trades, according to Marco Di Maggio, an assistant professor at Harvard Business School, and his three co-authors.
The authors analyzed a giant database of stock trades initiated by institutional investors from 1999 to 2014, which includes the identity of the broker executing each trade. They focused on trades that could be matched to the Securities and Exchange Commission’s 13-D forms. An investor must file one of these forms within 10 days of amassing a 5% or greater stake in a company. Often these filings are how the world finds out which company an activist is targeting.
In the 10-day period before a 13-D filing, the biggest clients of the activist’s broker are around 3% to 5% more likely to buy the target stock than in the 60 days after the filing, when everyone knows the activist has a stake, the authors found. That’s not true for smaller clients, who do less trading and are a less lucrative source of commissions for the broker. Such clients are slightly more likely to sell the target stock in the 10 days before the 13-D filing, indicating that they don’t know an activist is about to give the stock a bullish jolt.
“This strongly suggests that [the bigger clients] were made aware of the interest in that particular stock by the broker who executed the activist’s trades,” the paper says.
Brokers still play a big role in stocks trading, despite the rise of electronic trading. Last year, 42% of order flow from stock-picking hedge funds was handled by people rather than algorithms, according to New York-based research firm Tabb Group.
“As soon as there are humans involved, the potential for leakage is out there,” said Brennan Warble, head of Americas at Liquidnet, a New York-based company that runs an off-exchange “dark pool” for stocks trading.In addition to writing Robinson Crusoe, Moll Flanders, A Journal of the Plague Year and a ton of other stuff Defoe had in-depth experience of both business and politics. He was a promoter of the South Sea Company.
In 2014, a Wall Street Journal investigation found that stocks targeted by activists rose an average of 3.2% more than the overall market in the 10 days before filings revealed the activist’s stake. That result — based on an analysis of of 975 announcements by leading activist investors since 2007 — suggests other traders are catching wind of the activists’ moves and piling into the same stock.
There are a couple possible explanations for why that’s happening. The activists themselves might be telling fellow hedge-fund managers in a coordinated campaign — a strategy some call “wolf pack activism.”
Or brokerage firms could be the source of the leaks. Veteran brokers suggest one possible scenario: the sales trader executing the activist’s order is overheard by his colleagues, who share the information with their preferred clients.
Prof. Di Maggio says the evidence points to leaky brokers....MORE
In 1719 he wrote Robinson Crusoe and The Anatomy of Exchange Alley in which he described stock-jobbing as:
...a trade founded in fraud, born of deceit, and nourished by trick, cheat, wheedle, forgeries, falsehoods, and all sorts of delusions; coining false news, this way good, this way bad; whispering imaginary terrors, frights hopes, expectations, and then preying upon the weakness of those whose imaginations they have wrought upon...That may be the earliest warning in English against the intersection of news and equities.
Not the European earliest however. The Dutch were all up in that at least thirty and probably a hundred years prior:
From "Frontrun the Bank of England for Fun and Profit":
Hey, it worked with the ECB.*
From FT Alphaville:
Confusion and the BoE’s corporate bond buying scheme
... Re: Mr. Keohane's headline, I couldn't help thinking of De la Vega's 1688 book Confusion of Confusions regarding the trading of Dutch East India Company stock.
The analysis in The Confusion of Confusions : Between Speculation and Eschatology is a good introduction.
As another review puts it:
...He shows us all the tricks of the trade such as front-running large orders and spoofing the market with fake news to achieve a more favorable trading price.1688.
And then there is this from AFNS via 2012's "The World's First Stock Exchange (and first bear raid, first dividend, first equity derivatives...)":
Okay, that's actually America's Finest News Source.(VOC) $64.98 (+$13.84) (+27.1%) Shares in the spice purveyor soared on word that the three sturdy galleons dispatched two years afore had been sighted off the coast of Cape Verde, returning from their dangerous voyage to the exotic Orient with their casks brimful of redolent cinnamon, cardamom, and mysteriously intoxicating curried powder.
