.jpg)
A study conducted by Capital Markets Cooperative Research Centre (CMCRC), the Australian independent academic centre for capital market research, reveals abnormal trading volumes prior to public release of analyst recommendations on associated stocks, suggesting evidence of ‘tipping’ to privileged clients by some brokers.
The study was conducted by Professor Andrew Lepone, Dr. Jin Boon Wong and PhD candidate Ming Ying Lim. It examines broker trading volumes before and after analyst recommendations are made public. Data showed spikes in trading volume by recommending broker before the public release of the analyst reports.
This evidence suggests that analyst recommendations are possibly provided to broker clients via private release prior to the public release. CMCRC CEO, Professor Michael Aitken, said that while this behavior isn’t illegal, it does offer an advantage to those ‘in the know.’
“Our results document that after the private release of the information, trading activity increases most significantly for small and medium cap stocks,” he said. “Since smaller stocks have less analyst coverage, it is likely that analyst recommendations in these stocks provide new information to the market which provides greater profit potential from ‘tipping’ activities. We also noted that a direct relationship exists between recommendation changes (from buy to sell or vice versa) and volume, as significant changes in trading volume eventuated from recommendation changes.”
The research also examined the market impact costs of trades executed after the public release of recommendations, using intraday trade-by-trade data. Results show that recommending brokers experience similar market impact costs as their peers, providing an incentive to ‘tip’ clients to stay competitive for trading commissions. Interestingly, the introduction of broker anonymity in 2005 reduced market impact costs experienced by all brokers.
The paper did note that some brokers had implemented policies and procedures to avoid ‘tipping’ with analysts being dismissed for inappropriate behavior.
The research used publically available data that contains brokers ID for approximately 3,800 analyst recommendations on 338 ASX listed stocks.
For copies of the full study and interviews with Michael Aitken:
Kristin Westlake, The Continuum Partners
kwestlake@thecontinuumpartners.com
+61 416 219 358
