Benjamin John Pauley exposes some truth behind Australia's stock market in this two-part story on the lack of ethics within the ASX.
I WORKED AS a prison officer in a maximum security prison from 2010-2013. In that time, I met a lot of criminals. I left that job because I had an opportunity to pursue a career investing in the Australian stock market. I did so thinking I was leaving behind a world of criminal behaviour.
Actually, what happened was the opposite.
I left behind a world where criminals get caught, do time, get rehabilitated and then released. I entered a world where those who commit the crimes get off scot-free. This is my chance to tell a two-part story of a world which most people know nothing about, a world where people of the most dubious ethics are running the show. They are manipulating stock prices to their own advantage, spreading fake news and profiting from insider trading. It is a world where misconduct goes unchecked and unpenalised.
Welcome to the ASX. This is part one.
I like to call myself a value investor. This is someone who invests in a company based on a few metrics of value such as earnings, assets, debt and so on. Theoretically, I should have done exceptionally well since I started. I learnt how to invest from my father, who has an impeccable record during the last twenty years averaging 18% returns per year. It hasn`t been the case for me, though. Despite buying stocks which I thought were good value, I have not made any money. In several cases, I have lost the whole investment. I have witnessed company directors take decisions for their own benefit without any consideration for those whose life savings they are destroying. I have seen the behaviour of the big investment banks (most of them foreign-owned) who operate on the ASX with one motive - to get as much of other peoples' money as they can. If we have a weak regulator (which we do) they will do this any way they can get away with it.
Many have read the popular Michael Lewis novel Flash Boys (soon to be made into a movie). Lewis brilliantly portrays the U.S. stockmarket as being "rigged", where computer algorithms called high-frequency traders are able to get ahead of peoples' orders and manipulate stock prices. It is difficult to ascertain how much money these traders make, but you can be sure it is a lot. I can definitely say that it is happening right now on the ASX and it most surely affects the average investors profits. It results in unfilled orders, lower sell prices and higher buy prices. They use different exchanges called "dark pools" to cut ahead of peoples' orders because they have their computers inside the ASX building.
Why does the ASX allow this?
Because they profit from it. In the last four years, the ASX stock price has gone up almost 100% and this is during a time when the number of retail investors like myself has decreased.
According to the well-known ABC reporter Alan Kohler, in many cases it is the investment banks who are both running the dark pools and the high frequency trading. I witnessed how much money I was losing because of these activities and it did not sit well with me. In my prison job, if I saw drug dealing, assaults or standover, I was able to take action straight away. Here, I was now in a situation where I saw something illegal (manipulating stock prices and insider trading is illegal) and it seemed so difficult to prove.
The first thing I needed to know was which investment banks are running the show. It is very difficult to find out, but through my own trial-and-error analysis (combing through top 20 shareholder lists), I have narrowed it down to seven large investment banks. They are HSBC, JP Morgan, Citigroup, N.A.B., UBS, RBC and BNP Paribas. They call themselves "custodians". Whenever somebody claims the ASX is too controlled by these banks (Labor politician Andrew Leigh did in March 2017), they are told that these custodians act as holders of others' funds only and have no influence or voting powers. I would like to say otherwise with one example of Dick Smith.
On 28 October 2015, Dick Smith produced a report which said they were anticipating a profit of $40 million. The only problem was they were inflating profits. It hid all the problems they were having with excess stock which were later to come out. Investors had no way of knowing this. Then the share price started crashing. Fortunately we know who the sellers were because anyone who owns at least 5% must declare when they sell. A.M.P. started selling first. Next came N.A.B. Then CBA. On 2 November 2015, N.A.B. owned 9.5% of Dick Smith. Five days later, they owned less than 5%. It caused a massive fall in the share price. This is where I bought in. Given the $40 million dollar profit guidance, I considered this an incredible bargain. I probably bought the shares that N.A.B. were selling. Less than two months later, the company was in administration. I wonder if N.A.B. knew what was going on. They happened to also be the main financer of Dick Smith.
The point I am trying to make is that N.A.B. itself owned 9.5% of Dick Smith. As a custodian, they are listed as having 15.3%. This goes to show that people who say these investment banks are just custodians are not seeing the full picture. They are custodians for others money, yes, but they also own shares themselves and they provide the finance for the companies they own shares in. They also run the dark pools which trade the shares and they even do the high frequency trading which sees people orders and cuts in front of them.
Ben Pauley obtained a degree in Natural Resource Management from University of WA before going to work for three years in the WA prison service. He left that job to pursue a career investing in the stockmarket. You can contact him at firstname.lastname@example.org
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