2nd February 2012: Gina Rinehart’s FXJ Move

On 31st January 2012, mining magnate Gina Rinehart bought nearly 8% of Fairfax (FXJ) through Morgan Stanley.

 

New Matilda‘s Ben Eltham observed:

 

Precisely why Gina Rinehart is buying a stake in Fairfax remains a mystery. Neither Rinehart nor her company, Hancock Prospecting, have issued any comment on the move. Rinehart simply issued instructions to her broker, and bought up stock worth about $180 million. . . . It’s simply not necessary to buy a stake in a media company to get your message across.

 

Eltham and Jason Wilson each suggest Rinehart’s bid is to gain control of Fairfax and to promote her political views.

 

Examining the pattern of FXJ trading suggests other possibilities. FXJ jumped from $0.74 close on 2nd February to open at $0.82 on 3rd February. There were major sell-offs that day: during a 14-minute rally period from the market open 10:04am (4.27 million shares), 10:16am (1977.69k shares), to 10:18am (1523.01k shares); during the trader lunch period at 1:22pm (2779.19k shares); at 2:24pm (2185.33k shares); and an end of day sell-off (5.25 million shares) which ensured FXJ shares would open lower the following day.

 

The sell-offs fit a well-known strategy used amongst institutional trading desks: the ‘market squeeze’ trade. In late 2011, I watched J.P. Morgan and Japan’s Mitsubishi UFJ bank use this strategy with several other Australian shares. I found out the details from two sources: ASX regulatory filings made on behalf of offshore hedge funds, and from ThomsonReuters’ SIRCA database which has tick data of individual trades.

 

Here’s one way how the ‘market squeeze’ trade works:

 

1. The trading desk buys up huge amounts of a target share: enough to move the share price. This creates a volume spike that will initially move the share upwards: a stochastic market dynamic used in jump diffusion models of mathematics and option pricing.

 

2. The volume spike creates a red alert which attracts other, different traders. Day traders who use technical analysis, charting, or momentum/rally signals now focus on the share. Exchange trade funds and institutional money managers who must rebalance their portfolios are now also interested. This creates a market for the trading desk to sell to. The share also shows up on the daily volume indicators of the major share trading platforms. The financial media becomes interested.

 

3. The trading desk then dumps a large volume of the share at strategic times during the day. This locks-in a short-term or daily profit for the trading desk. It also influences the upper and lower bounds of the share price. Monte Carlo Markov Chain simulation can predict the share price pathways. The trading desk can then adjust its order book and its market execution costs.

 

4. Meanwhile, the trading desk sells off smaller blocks of shares over a 3-4 week period. This tactic influences high-frequency trading systems. It usually means that the share price trends downward as the trading desk has market-maker control — or several trading desks at different firms create a market equilibrium.

 

5. The trading desk can make profits in several ways. It can dump a large amount of shares at the market open which usually means the share price will fall during the day. This tactic will create cyclical and volume-based effects. It can force other traders to sell once their stop-loss levels are breached. Finally, it can sell shares at the peak of a volatility spike and then buy them back at a much cheaper price when the market trends lower. The trading desk’s volume, its order size, and its lower execution and transaction costs means that it can make a profit from spreads of several cents.

 

FXJ’s trading after Rinehart fits the ‘market squeeze’ pattern. It’s possible that Rinehart will pursue the ownership agenda that Eltham and Wilson emphasise: Michael Milken financed Sir James Goldsmith and others to do so in the 1980s era of leveraged buyout deals. But it’s also possible that Rinehart is using value investment criteria to make a quick profit from market volatility. Or, that Rinehart’s announcement enabled Morgan Stanley and/or other trading desks to use a combination of long/short, paired, and event arbitrage strategies. Someone made a killing on trading FXJ on 1st February 2012.

 

Eltham is right: you don’t need an ownership stake for a media company . . . if you pursue other agendas.

Picking Up The Phone To Hear White Noise

Social-democrat economist John Quiggin fires an interesting salvo in the journalist-blogger debate: ethics and journalistic practices are perhaps the key distinction between the two.

Watching the hostility between ‘old media’ journalists and some Web 2.0 bloggers is often like watching Muzafer Sherif‘s Robbers Cave experiment. For bloggers, traditional journalists are constrained by objectivity, news values and institutional power, and traffic in biased op-ed columns and lightly rewritten corporate press releases. For journalists, bloggers don’t understand the norms and practices of the craft, don’t navigate the institutional shadow network, and vary greatly in the quality of their analytical insights. The two clashing stereotypes fuel a circular debate, which like Sherif’s experiment, may only change when a frame-changing exogenous threat is introduced.

For me, Quiggin makes three key points: (1) journalists have a socially recognised role to “pick up the phone” and talk to strangers; (2) journalists may select material from their interviews into a story and do not have to report everything; and (3) journalists have “a formal code of ethics and a set of informal conventions” to do this whilst bloggers do not. In doing so, I believe Quiggin adopts a middleground position similar to Terry Flew, Barry Saunders, Jason Wilson (from their YouDecide2007 project) and my own thoughts on citizen journalism, with some new insights.

My personal experience of Quiggin’s first point is that their role can empower journalists with Freedom to talk with anyone, and to view a situation through different, iterative stances. As I discovered during a 1994 student journalism stint and 1995 coverage of Noam Chomsky‘s Australian lecture tour, this is a great shock: in the right situation, people can tell you anything, and you can also become a a participant-observer who is now inside the unfolding events. It’s a little like Jim Carrey‘s character in the romantic comedy film Yes Man (2008): you ‘forget’ the self-limitations of yourself and act beyond normal social conventions.  As Quiggin observes, few people can ask questions of strangers and expect to get revelatory answers.

This approach reaches its zenith in New Journalism as a methodology and repertoire of practices in three ways. First, the journalist may create the “story” through a catalytic, influential effect on the external environment. Second, the journalist can become part of the “story” through capturing their subjective consciousness, and trying to capture a similar stance from the other participants through internal dialogue, scene reconstructions and other techniques. Third, the journalist has more freedom in convention, methodology and practice, such as using fiction techniques in a non-fiction profile. At its core, New Journalism fuses autoethnography, anthropology and acting, which are facets that a blog publishing system might not capture.

Quiggin’s second observation is a major flashpoint in the debate: how journalists hone a story and select the facts to report. Bloggers turn to critical media studies for many of their arguments: objective news values, op-ed columnists and other biased sources, institutional forces, and a conservative implementation of web publishing capabilities. In turn, journalists point to the chatter/noise factor in blogs: they may be alternatives to op-ed columnists and newswire press releases yet do not yet replace areas that are resource-heavy and have mature practices, notably investigative journalism. Bloggers counterargue they have more freedom to use nonlinear narrative styles and to publish the raw sources. Perhaps one of the lessons from YouDecide2007 and AssignmentZero was that the editorial decision process to hone and select material is more nuanced in practice than Twitter‘s role as a first responder in disasters and emergencies.

How do journalists navigate such decision processes? Journalists have discipline-based norms, practices and ethics as barometers. This acts as a check and balance within newsroom culture and its role only becomes clear in a go/no-go decision where the editor has to weigh up the competing interests of different stakeholders and the potential outcomes of publication. In contrast, many bloggers appear to be driven by normative-based anchors (Web 2.0 compared with institutional journalism) and commons-based advocacy (education, sustainability, future generations). But belief alone in noosphere politics and networks may not be enough to surmount the different manifestations of power. If bloggers want to influence the objective universe they can learn much from journalist ethics and strategic nonviolence.