WHY DO SMALLS AND MICROS POP ON NO NEWS?
I thought I would write my opinions on the above after listening to a Claude Walker podcast. I like CW; he is, for me, a “new age” investor, being a Millennial, so having been born when I was helping to manage billions of FUM. He appears to have a process, putting him ahead of most, and I am interested in the investing views of the next generation, since it is likely to be different to mine. Unfortunately, there will be fewer Boomers and more Millennials in the mix going forward, that is certain. Lol
Anyway, back to the story. CW was attempting to explain why stock prices move in certain ways and was using the lens of index inclusion as an explanation of that. Ok, that is a reasonable thesis, but I would outline the following and put forward my thesis, having observed it in action many times.
There are two things against the index inclusion thesis. One is that it is too obvious; even over a decade ago, there were stories of even index funds front-running index inclusion. They could do this, knowing what was coming and putting a position in beforehand. That way, they get any upside, maybe for themselves, and are set against the index. This is small fry for these funds. Tiny percentage moves, but since their fees are very low, it might be worth the trouble. Secondly, unlike their large-cap brethren, I don’t know any small or micro guys that index hug. In fact, it's one of the advantages of being at that end of the market. The big guys have a stable and concentrated top 20, which is bad for active management; the smalls have a dynamic and an index much more easily beaten. So little incentive to index anything. There is much more I can go on with this, but it's not the main point. The summary here is that the index inclusion front running is small fry, too easily arbitraged out and not worth the trouble, would be my view, for active managers.
So why do stocks seem to rally in a surprising way with no news? I would go in a completely different direction. To understand why, you must understand the information dissemination in the industry, especially at the small and micro end and the part brokers play in this.
A while ago, there was a story involving XXXX of XXX fame and broker YYYYY. I've met YYYY several times, and I don’t know XXXX. I am regurgitating publicly released stories here, and the truth may be quite different. What appears to have happened is that YYYY got an order from a large fund for a small stock. When that happens, an experienced broker would probably know the stock price is going higher. According to the story, YYYY then rang XXX and told him to buy before the order took effect. Why call XXXX? Well, I can only speculate. But XXXX is apparently (there are a lot of apparently here lol), the largest trader in the Australian market; he is a big fish. If you can get on his approved dealing list, it's worth a lot. I'm not saying what XXXX/YYYY did was wrong; and the facts could be quite different (who knows), people can make their own views on that, but I am highlighting the information highway that exists, driven through the broker network, especially at the small/micro end. To me, it's not surprising that it occurred, but surprising that it became public. I once spoke to a guy who worked at XXX and asked him how XXXX spent his day. He said he is on the phone all day; I suspect not talking to his mother.
To leave the two gents behind, this is how the chain of events unfolds. FM “A” sees a stock moving for no identifiable reason. He starts ringing around his broker contacts to get information on that stock. His biggest fear is that his competitors are getting a jump on him.
FM-“I see XYZ up a lot today, any idea what's going on?
Broker 1—don know
Broker 2—I believe it's domestic buying, or foreign buying or corporate buying, or I'm not at liberty to tell you (that’s the best one).
Broker 3---heavy buying from the ABC broker who usually deals with blah blah.
There are many ways to get the information out without betraying client confidentiality.
Some fund managers play this game aggressively. They want to know who is buying and if they are likely to know something not well known, or just have heavy ongoing buying. This is not necessarily inside information and usually isn’t.
Once they find out any useful information, time is of the essence; you can't start a multi-week due diligence. its move now or it's useless information.
So what do we see? We see a stock no one talks about, then everyone seems to be on it, and then it goes quiet again after a big uplift.
I would say there are funds whose total value added comes from working this information channel very aggressively. A question I ask is Who is the puppet master? I think it varies; someone comes across an idea, and it goes viral.
Of course, I knew this existed when I was in the game, but I didn’t play this game. Ok, we will get into moral and legal issues here, but to each his own. I would point out that most of these players are retail-style fund managers, not institutional managers, who are subject to higher levels of diligence. I'm sure some would take issue with that, lol.
Anyway hope this gives you some idea about the fund management machinations. For retail punters, it's just part of the game. Unless you pay enough brokerage to get several calls a day from a broker, forget it. However, just knowing this gives you a better understanding and explanation of some situations.
If you think I appear overly cynical about my former industry, you're right.