Market manipulation unreasonable conclusion - expert

“Nothing unusual” in contentious trading at the centre of New Zealand’s first market manipulation trial, the defence’s star witness has told the Auckland High Court.

Wednesday, October 12th 2016, 8:00AM

by Miriam Bell

The Financial Markets Authority (FMA) has accused Milford Asset Management portfolio manager Mark Warminger of cross-trading and making trades to artificially set prices.

Their allegations revolve around 10 different trades made by Warminger between December 2013 and August 2014, which the FMA’s expert witnesses have said constitute market manipulation.

However, Warminger’s legal team has now kicked off the defence and they say the FMA has presented evidence that fell well short of proving that Warminger had intended to mislead the market.

Their star witness, Capital Markets Cooperative Research Centre chief executive Michael Aitken, took the stand on Tuesday.

Aitken is internationally regarded for his work in securities markets and for the design of market surveillance software SMARTS, which is used by 50 national stock exchanges including the NZX.

He told the court it can be difficult to identify market manipulation, but that there are seven tell-tale signs of market manipulation.

These are establishing a new bid/ask price; moving the bid/ask three price levels aggressively without testing the market; trading in small volumes; trading at the close of the market; no independent auction; reversion of price at the next day’s trading session; and uneconomic trading.

“If you were to find four of these seven signs you would start to look at the trading in question seriously,” Aitken said.

“If there were three, you might run trading pattern alerts and look at the trader’s other trading. It’s a question of judgment.”

However, a charge of manipulation can be challenged on the grounds of the need for a legitimate trade, although traders have to be mindful of their need to not bring the market into disrepute, he added.

Just as the FMA’s expert witnesses provided a detailed run-down of Warminger’s trades, so too is Aitken.

He started with Warminger’s trading in Fisher & Paykel Healthcare shares on May 27, 2014

Aitken said that, taken on its own, the pattern of trading activity that day suggests there was a sudden change in activity due to Warminger’s trades.

But only one of the tell-tale signs of market manipulation was present and, overall, he found nothing unusual about Warminger’s trading that day.

Warminger started the trading at an established ask price and traded in reasonable volumes. He also executed the order in timely fashion and let it trade out at a reasonable price, giving time for the market to respond.

While the FMA allege that Warminger lifted the price up to the bid price he was wanting to sell at, it was clear he was only interested in selling at $4.35, which was a reasonable trading price, Aitken said.

On the day before, Warminger was trading the FHP stock at $4.35 and it finished the day at $4.34. On the day in question, the stock opened at $4.32 and closed at $4.39.

But there was an abrupt movement of price after opening and that seems to be what the FMA has an issue with, Aitken said.

“I don’t think it is reasonable to conclude that Warminger induced a price that was false or misleading. It wouldn’t be unusual for the price to reverse if that was the case. But, in this case, the price continued to rise.”

He said that, rather than $4.35 being the unusual price, he would say it could be the $4.32 price – and that he would ask why that stock opened at $4.32 that day.

Earlier in the day, Michael Heron QC summarised the defence’s case, point by point, in response to the FMA allegations.

He said the FMA’s case suggested criminal conduct, but did not provide any concrete evidence to back up the allegations.

The evidence from Aitken would show there was, in fact, nothing to suggest market manipulation in Warminger’s trading, Heron said.

Aitken continues to give evidence and the defence is next set to call Milford’s head of investments, Brian Gaynor, and Warminger himself to give evidence.

Tags: Market Manipulation Milford Asset Management