June 2003
Start with the premise the Australian market is dominated by a small number of large players. Logically they must be antagonists/opponents in the marketplace. We have seen behavioural evidence that can only lead to the conclusion the large players will and do act in collusion. This is not a marketplace populated by many groups and many individuals acting independently in their own self interest at all times. The fact is, the SFE had to take steps in the year 2001 to prevent market ramping and rorting. This had been going on for some years but the ASX and SFE only acted when a small upstart hurt the "majors" and the "majors" complained loud and long. The complaints had occurred many times before and nothing was done. But the one time the "majors" got hurt the noise was deafening. They had been doing it for years. Do leopards change their spots. So far no whistle blowers have appeared. No published swan songs have appeared in the financial press. In spite of the 2001 furor, the media was silent. No investigative research was ever published. It disappeared off the radar. Yet the authorities, and the media, pursued Rene Rivkin over an amount less than $1000.

references
Official ASX disciplinary report action by ASX against AOT Securities 16 Dec 2002
at www.asx.com.au/about/pdf/disciplinarycirculars/658c_02.pdf
The "Age" in Melbourne published the following article on 17 December 2002
at www.theage.com.au/cgi-bin/common/popupPrintArticle.pl?path=/articles/2002/12/16/1039656342953.html

australian asx market rigging articles
lawbookco.com.au/academic/FalseTrading Nomura Case
at www.lawbookco.com.au/academic/ccl-ezine/pdf/vol8issue1_FalseTrading.pdf

demonstrates the media is not part of the system of checks and balances and is not looking out for you.



the power of the few - a
the fine denim affair
better known as the waterhouse-rivkin law of relativity
For those who remember the fine cotton affair .. for those who don't it's on the web ..
When the ASX corporatized, Standard and Poors ("SAP") took over the ASX indices to provide transparency and eliminate conflicts of interest. SAP was to be the HANSARD of the indices. The independent reporter. On April 6 2004 NewsCorp ("NCP") announced it was relocating to US in October 2004. Initially SAP announced NCP could not be in 2 indexes at once. Capitalised at $70 billion NCP comprises 250+ points of the ASX200 index. Given the natural laws of the market place, (ie, thats the way the cookie crumbles, and, let the cards lay where they fall), and the approximate mechanics of the index, NCP should be replaced, in the index, by a company outside the top 200, worth at best, $½ billion or 5 index points. News of the potential removal of NCP from the index should have caused the December 2004 SPI contract to collapse 200 points. The contract did not even tremble. Not even a tremor. The fix was in. The fastest fix ever seen. Faster than fine cotton.

June 23 2004 SAP confirms its decision. Again the far contracts did not falter.

Standard & Poors 23 June 2004 Press Release NewsCorp.pdf states in such an event, SAP would, consistent with its general policies, co-ordinate index changes to limit unnecessary market volatility and the issue of dislocation.

What is SAP's definition of unnecessary and dislocation? When did SAP become responsible for managing market volatility?. Was it about the same time Hansard became responsible for managing the volatility of parliament?

Bryan Frith The Australian June 24 2004
The ASX was opposed to News falling out of its indices The SAP index committee has five representatives - three from SAP and two from ASX. If the talk is right the committee split on those lines - ASX wanted a compromise to be reached to allow News to stay in its indices, at least in some form, but SAP didn't want to create a precedent. Because it had the majority, SAP prevailed. However, SAP's decision to put News immediately in the NYSE S&P 500 index and to phase it out of the Australian indices over nine months, in four tranches, is thought to have satisfied most of the Australian institutional holders

Bryan Frith The Australian 29 June 2004
SAP originally intended NCP would be removed from ASX indices in three equal tranches over a three week period, and that was a concession because normally such changes would be done over a matter of days. SAP appears to be now backing away from that timetable, suggesting the phase-out may take place over a period of months rather than weeks, perhaps as much as six months. SAP said last week it would consult with market participants as to the appropriate level and period of the phase-out. It seems local institutions strongly favor the change taking place over as long a period as possible to ensure an orderly transition.

Jane Schulze The Australian August 07 2004
NCP's move to the US received a boost yesterday when index manager SAP provided a detailed timeline for any move. SAP had been widely criticized for fostering market uncertainty for failing to outline how the move would be managed. After consulting with fund managers, it has now unveiled a four-part transition process which will kick in if NCP shareholders approve the move later this year.

Wendy Frew SMH October 06 2004
In a surprise move, international stock index operator, MSCI announced it would remove NCP from the Australian indices, to the US indices, less than a week after the shareholder vote in Adelaide on 26 October should the relocation be approved.

the smoothing effect
Postponement of the effect of an event. An unacceptable, and not unknown practice in financial circles, known as smoothing. Postponement of expenses to next reporting session increases profit. Postponement of revenue to next reporting session decreases profit. Activities prevalent in the dot.com era the results of which are now well known. Symptomatic of the power and influence of the dominant few.

SAP has created a powerful and dangerous precedent. In the event of a substantial two-day "rout" in overseas markets with the potential to cause a drop in the Australian market of say 200 points would meet the very criteria SAP has established. Unnecessary volatility. Based on the above criteria, SAP would now be expected to step in, pull the levers, and "smooth" the impact over a 9 month period.

Footnote
26 October 2004 NewsCorp shareholders approve relocation to US. June 2005 SPI does not falter
24 Jun 2004 spread between December 2004 SPI and June 2005 SPI = +27 points
31 Aug 2004 spread between December 2004 SPI and June 2005 SPI = +20 points
25 Oct 2004 spread between December 2004 SPI and June 2005 SPI = +21 points
26 Oct 2004 spread between December 2004 SPI and June 2005 SPI = +21 points


Old saying - Follow the money trail. From the outset the heavy money was on one outcome. Evidenced by the heavy money staying on the table. Extreme confidence. The ensuing 6 months was merely the dance of the tarantulas.


demonstrates the inability to obtain simple answers to logical questions.


August 2004 inside the tent
On Friday 30 May 2004 between 10:00am and 14:00pm the SPI had an upward move of 14 points. Between 14:00 and 15:45 it fell nearly 15 points. The following week, the "market place" section of the AFR reported an email had circulated among brokers on that afternoon about the pending disposal of a $200 million portfolio. The sale took place at 16:05 in the after market auction. The cash index effect was only 4.40 points. The SPI recovered all its loss after 1610pm. And they got Rivkin for a mere $1000.


the power of the few - b
Michael West - Margin Call - The Australian - 19 February 2005
The ASX. What a profit result this week for the monopoly which is listed on itself and regulates itself. ASX is a fine company indeed but does it attend its own classes on market transparency? The latest ruminations about blacking out stockbroker numbers attaching to trades is a shocker. Retail punters should march, post haste, on Bridge Street because trading needs more transparency, not less. This is a blatant free kick to the powerful eight (merchant) banks that control 80 per cent of ASX turnover. Ban broker numbers (until three days are up, as is the proposal) and the funds management/principal punting/corporate advisory divisions of the ASX cartel member-owners will run amok. Um, perhaps this is why we heard this week that students of an ASX compliance course were advised that the term "Chinese walls" was being phased out in favor of "invisible barriers". A bit like schools changing blackboards to chalkboards.

The above is an example of Pareto's Law in action.


the power of the few - c
the amazing coincidence
Monday 21 February 2005 it is learnt the Sydney Futures Exchange will terminate its broker statistics service as at the end of February 2005. Broker Statistics is a live display of broker participation in the market. Showing broker code and quantities transacted. Gone.

Early in 2004 the Sydney Futures Exchange ceased live publication of Broker Statistics for Bonds and Bills. Reasons given for cessation, at that time, are identical to those outlined above in West's article on ASX broker identification. It's the old closing the stable door trick. A bit late after the horse has gone. As the saying goes, you don't know how good it was until you lose it.

Few know of it's existence. SFE doesn't advertise it. Vendors don't offer it. One solitary broker does. So who cares.

demonstrates the constant erosion of the system of checks and balances in the market place.



proprietary trading
smoke and mirrors - a bedtime story
source wikipedia
Proprietary trading is a term used in investment banking to describe when a bank trades securities with its own money as opposed to its customers' money, so as to make a profit for itself. Although investment banks are usually defined as businesses which assist other businesses in raising money in the capital markets, most investment banks make the majority of their profit from trading on their own behalf.
source investopedia
When a firm trades for direct gain instead of commissions. Essentially, the firm decides to profit from the market rather than from commissions and fees. Firms engaging in proprietary trading believe they have a competitive advantage that enables them to earn excess returns.
source - SMH - 20 May 2006
The ASX-ASE estimates 30 to 40 per cent of total stock market turnover on any given day is proprietary trading.
Merrill Lynch's proprietary desk is one of the most prominent in the local market, along with Credit Suisse.
Above estimate is considered an understatement made for public consumption. More accurate - about 60%

Goldman-Sachs proprietary trading desk reportedly accounts for 80% of total turnover on NYSE in the march 2009 quarter.



high finance in hightown - a true story
In the 1990's a stressed-out proprietary-desk trader (now long-gone) would periodically let slip a few gems. He worked for an Australian based broker that has since been swallowed up in the consolidation of later years. Call them HighTown.

As told ..

The principals of HighTown met every morning at 7:00am to review the overnight action in the overseas markets. The house had something like $50m of its own working capital to push around and get a return on. One of the top 10 ASX stocks, (big enough to push the market around), registered in Australia, and traded in London and New York. Being an Australian registered company, the London and New York markets for that stock were often thin. Frequently when the offices of HighTown opened at 7:00am there would be a number of overseas orders for large quantities of that one stock sitting in the the fax machine in-tray. Naturally the proprietary-desk derivatives trader wasn't supposed to know that - i.e. - Chinese walls. Knowing large orders in that one stock would move the market, the nature of the 7:00am meeting was to assess where best to trade the house-funds that day. Naturally if the large overseas orders were buy orders, the house activity for the morning was inclined to the buy side to give the market an extra shove up. If orders were sell orders, the house bias was to the downside, the boulder given an extra nudge down, with the house ambulance waiting at the bottom of the cliff.

An indication of the extent of proprietary trading can be seen on the last page of brokers recommendations and newsletters which have mandatory disclosure statements listing the stocks the house holds on its own behalf at the time of the recommendation. Disclosures relate only to stocks contained in the newsletter and do not represent the full extent of house holdings. Of course if recommendations are not issued, the broker is not obliged to declare their interests.
 

honkers and the house of the rising sun
Just prior to the Asian markets opening the fax machine again ran hot. Usually around 11:00am through 11:45am. Long-Gone PropTrader would express amazement at the size of the orders and dismay at the apparent suicide nature of them. That's where lunch-time surges came from.


program trading
a variation on tape reading - a simple clue

Program Trading can mean a number of things. Total turnover on the ASX-ASE is around $4b each day. It is estimated $3b of that is proprietary trading. It's not done all at once. It's managed in small parcels as discussed elsewhere in this site. Given the value and volume, it's unlikely screen operators sit in front of a screen all day picking away at small orders - mistakes can happen. It's mechanized. If you know what to look for it can be seen. It's regular. Progressive. Happens every day. On any of the top 200 stocks, regular, uneconomic transaction sizes are evidence of iceberg orders and proprietary trading. Brokers don't pay brokerage. read the Goldman Sachs article above.


source: Leon Gettler - age.com.au -March 24, 2007
ASIC has challenged the effectiveness of the so-called "Chinese wall" intended to separate Citigroup's proprietary trading desk, which trades in shares using the bank's own money, and Citigroup's corporate advisory services, which regularly deal with material information that could send a company's price up or down. ASIC's case challenges the way banks conduct proprietary trading, which is a big money spinner. In 2006 five of the biggest investment banks, Morgan Stanley, Goldman Sachs, Merrill Lynch, Lehman Brothers and Bear Stearns, generated $US61 billion ($A78.2 billion) from proprietary trading, about half their total revenue, and a 54 per cent increase over 2005.


Proprietary Brokers = Prime Brokers = Name Brokers
An article dated 20 June 2007 published by the SMH, states Westpac is looking to grow its online trading presence to compete against CommSec, which dominates the online share trading market with a 48 per cent share and Etrade, has 26 per cent. A total market share of 74% between the two retail majors. Allowing a 6% share to Westpac gives a total of 80%. That leaves a 20% remainder spread among the "name brokers".

A notable difference is Westpac, Commsec and Etrade are not proprietary trading houses as are the "name" brokers.

Prime Broker defined
List of Prime Brokers

It will be noted from the list of SFE Futures Brokers
•  Commsec, Etrade, and Westpac are not futures brokers.
•  The futures brokers are also (mainly) listed as "Prime Brokers".

imperator @ http://www.imperator.com.au/informationoutline~nocache~1~SubTopicDetailsID~1354.htm
There is no better illustration of proprietary trading than FX. MBL, an early leader in foreign exchange trading, would offer buy/sell prices to clients in US dollars and other major currencies. Miners being among the biggest users of this market. MBL’s ForeX desk did not link clients buying US dollars with clients selling (as a broker would) but rather took the other side of the client’s position, trading it in the market with other banks and proprietary operators with the purpose of making a profit. Today, of the billions of dollars traded daily in foreign exchange markets, only about 10% involves a "real" client such as an exporter. The other 90% is speculative (proprietary) trading by the banks.



CSPA - ASX after market auction
The 16:10 market. Closing Single Price Auction "CSPA".
15:45 is a critical time for the SPI. To appreciate this we must visit the physical market of the ASX. The ASX conducts an aftermarket auction at 16:10 everyday. Periodically after-market auctions can move the ASX200 index up or down 10 points in one hit ie 11 pts 3 Nov 04. Not often but frequently enough. Back to the SPI. Interesting, each time a large move at 16:10 occurs, it is preceded by a surge in the SPI starting about 15:45. Be careful of unexplained moves in the SPI between 15:45 and 16:00 that are not accompanied by a corresponding move in the ASX200 cash index. i.e. the premium or discount suddenly expands. It is highly probable the corresponding move will materialize at 16:10. If one side of the market in any one of the top 10 stocks is particularly thin, the cash index can be moved significantly by an attack on the "thin" side of the market at 16:10 at lower than normal cost. If it feels like, looks like, and smells like insider trading it probably is. If the move is against you get out. You wont win. It will get worse after 1610pm. Attacking the thin side of the market.

On the last trading day of a quarter the pre-open period prior to the CSPA is extended by 5 minutes to 16:10 with the CSPA from 16:10-16:11. eight pages of explanation by ASX [ASX has removed this article] are required to explain the mathematics, without mention of its purpose. A basic business rule is the more complicated a scheme is, the more likely it will be abused. The CSPA is a forum for large trades only, where king elephants wrap up the day. Why would a large order be any more successful at this time, a 5 minute window, than any other time of the day, unless, by pre-arrangement, there is certainty it will be met. It may be argued to post a large order during the normal session, and leave it sitting there would lead to a "disorderly market". Knowing the CSPA is available enables large orders to be executed "elsewhere". Consequently the normal session is "thinner" that it would otherwise be. Which in turn creates the conditions conducive to an ambush. Hobson's choice. A disorderly market or an ambush.

It is understood (in broker circles) if one particular broker trades SPI futures aggressively during the "CSPA" pre-open, that particular broker will have been a heavy buyer/seller in the cash after market, with a flow on effect on the futures.
Footnotes:

November 2005. The 16:05 match was extended to 16:15. Don't know why. No explanation.
March      2006. The 16:15 match was reduced to 16:10. Don't know why. No explanation.
NB: Periodically, at calendar quarter endings, for one day, the match can be extended out to 16:20 hours.
NB: 2008 CSPA auction now at 16:10.

The ASX200 (XJO) index works hard to achieve a range of 16+ points on any day. In ½ point increments.
On 3 November 2004 the ASX200 surged 11 points in one hit, at 16:05, in the closing "CSPA"
On 9 December 2004 the ASX200 rose 11 points in two hits at 15:58. Whereas the SPI rose 13 points between 15:50 and 16:05. One broker was the only buyer. Both times. Same time, same broker, same action.
Intel travels faster than speed of light through paper walls. Arrives 10 minutes before leaving. Mental telepathy.

On Friday 30 May 2004 between 10:00 and 14:00 the SPI rose 14 points. Between 14:00 and 15:45 it fell 15 points. The following week, the "market place" section of the AFR reported an email had circulated among brokers on that afternoon about the pending disposal of a $200 million portfolio. The sale took place at 16:05 in the after market auction. The cash index effect was only 4.40 points. The SPI recovered all its loss after 16:10.

On 24 August 2005, the ASX200
Fell 2.5 points after the market closed at 16:00 on completion of the CSPA
Then fell a further 8.9 points sometime after 16:30 and after the CSPA

On 25 August 2005, the ASX200
Fell 3.6 points after the market closed at 16:00 on completion of the CSPA
The CSPA did not conclude until 16:20
Then fell a further 12.7 points sometime after 16:30 after (an extended) CSPA
Most news reporting systems did not report the fall until 07:30 the next day, 26 August 2005


No explanations. No announcements. Un-reported facts.

Additional information