In Your Face

In Your Face
Thought provoking opinions on topical issues.

Wednesday, June 16, 2004

Confidence in the Financial System

Sir Richard Sykes, a "big player" in UK business circles and a leading government adviser, has published a report entitled "Restoring Trust; Investment in the 21st Century".

Sir Richard, worried about the small amount of money that people are putting away for their retirement, is trying to persuade investors to return to the UK stock market.

With the melt down in share prices in the first few years of the 21st century, the £40BN shortfall on endowment policies and the Enron and WorldCom scandals to name but a few; investor confidence has taken a battering over the past few years.

Sir Richard ought, in some respects, to be able to count on the help of the Financial Services Authority (FSA). Their primary function is to maintain confidence in the financial system in the UK.

One significant piece of the jigsaw that forms the financial system is the trading of shares on the stock market. Confidence in the working and price mechanisms of the market will minimise investors’ fears about investing in that market.

I have been watching the activities surrounding one particular share, with a degree of fascination over the past few months.

The share, which shall remain nameless, is highly volatile. Its trading range, in pence, has moved from below 10p to the high 70’s then back to the mid 30’s. All of this, in spite of the fact that the company has yet to earn single penny in revenue from its activities.

The main driving force behind the price swings have been:

  • Optimistic news releases via RNS and AFX notes.

  • Speculation by gullible fools.

  • Ramping and de-ramping (talking it up and talking it down), on the bulletin boards of financial websites.

  • Optimistic conversations, and emails, between the CEO and shareholders. The subjects of these "private exchanges" are then published, by the same shareholders, on the bulletin boards.

To some extent this will always happen in a free market. However, the degree to which this has happened with this share has given me much cause for concern.

Matters came to a head recently when a false AFX note, containing information that would have caused the share to leap, was posted on a bulletin board. On discovery that it was a fake, the poster claimed to have posted it as a joke.

Following on from that, the CEO in an email to a shareholder (the contents of which were naturally posted on a bulletin board), noted that he was fed up with the volatility of the share price; and that news flow would be staunched in order to stabilise the price, and remove the speculators from the share.

There are two possible scenarios, but only one conclusion, wrt this email.

  • The posting of this email, if false, means that the poster was trying to manipulate the market.

  • However, should the email be genuine; then it means that the CEO was trying to manipulate the market, via news management.

Either way, this is a very clear example of market manipulation; something which the FSA has an interest in stamping out, in order to maintain confidence in the financial system.

I applaud Sir Richard’s intentions. However, before trying to persuade investors to return to the market, he needs to ensure that shenanigans such as this are stamped out. In other words he needs to ensure that the FSA are proactively investigating occurrences such as the one I have just described, and taking action where deemed appropriate.

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