A 'Window Dressed' Stock Market Rally on the ZSE

Is it unusual for the share price of companies to move up one may ask? Most would answer no, and to most investors, a rising share price is desirable. However, suspicions may arise depending on the timing of those stock price increases.

As the markets awoke to news that the Securities and Exchange Commission of Zimbabwe (SECZ) was conducting investigations of a few stocks after those counters experienced considerable gains in their prices on a single day's trading. Fidelity (Assurance and Insurance) rose by around 53% to close at US 13.01 cents on the 30th of December 2013. Similarly Zimplow (Industrial and Engineering) saw its stock rise by 33% at close of trading on the same day. Interestingly, for both of the counters, those gains in share price were on the back of relatively low volumes of trades of just 1000 and 96 000 shares respectively.

A study of nearly 10 000 stocks on the New York Stock Exchange found out that on the final trading day of each quarter since 2004, there was a significant increase in the number of counters that saw their price firm sharply, only to plummet substantially during the course of the following trading days thereafter.

Most financial analysts explain this phenomenon, to the fact that fund managers would employ strategies to enhance the appearance of their fund or portfolio performance. This is usually done toward year or quarter end, a time when performance reports and list of fund holdings are usually sent to clients. As a result of this window dressing which can be know in financial jargon either as "marking the close" or "portfolio pumping", the performance results of funds are made to look pretty albeit deceptively so. This would ensure the portfolio funds to earn more in the way of management fees.

Fund managers typically drive up share prices through aggressively bidding for more shares of stocks they already own and in so doing causing a spike in their prices which will inflate the value of their existing portfolio. On the other hand, they may sell loss making stocks right toward the end of their reporting season to clients

Window dressing mainly is carried out in thinly traded stocks whose share prices will tend to fluctuate considerably.  In such cases, a fund that has a substantial holding in a relatively small counter can drive up the price of that counter by purchasing as little as 100 shares of that stock at a premium round about the closing moments of year or quarter end trading. By so doing, the value of the Funds under Management (FUM) will be go up and the money manager will realise higher fees, as well as other potential clients.

Ordinarily, any increase in the price of a stock should have underlying fundamentals. It follows therefore that any sudden spike in share prices that is not substantiated by an underlying factor in the market fundamentals of a company immediately draws suspicion. However, for the several counters on the Zimbabwean Stock Exchange that saw their share prices rise significantly in one day, there is barely any information that relates to their company prospects that could have justified the sharp increase in their prices. When one considers the moderately low volumes traded as well as the timing of those trades, one cannot but question if it was a typical case of window dressing by fund managers in the local market.

As the SECZ tries to investigate whether the said matter was a case of window dressing or not, it is not immediately conceivable how they can prove this. The mechanics of the stock market are such that there are relationships between multiple traders across multiple securities and it is not easy to match trades to the traders who made them. Furthermore, as trading on the local bourse is still manual; it would be complex to prove window dressing at least without the SECZ having to go through confidential records and getting assistance of the stockbrokers who are involved in trading.

The question therefore arises as to whether automation of the local exchange would help curb instances of window dressing.  In more developed financial markets information about companies and their prospect is readily available electronically and this improves transparency and informed decision making. For example, in South Africa, the Johannesburg Stock Exchange has the JSE news service (SENS) which frequently churns out market information on a daily basis. This would help in analysing whether an increase in a stock's share price is justified by information about the company that would increase investor sentiment toward that company's future prospects.

Limit up-limit down price circuit breaker mechanisms are a feature of most automated trading systems. These are designed in a way to prevent sudden and volatile share price movements and prevent  stock trades from occurring outside pre-specified price bands by pausing trades altogether when there is a marked decline or rise in the share price. As a result order and transparency in the markets is promoted. This seems to make a case for the forthwith automation of the local bourse to increase efficiency and curb incidences of window dressing.

That being said, a share price increase generally affects everyone who holds that stock. Therefore as a result of that rally witnessed on Monday the 31st, investors with holdings in ABC holdings (Banking & Finance), Fidelity and Zimplow enjoyed as the stocks rose 18%, 53% and 33% respectively. It remains to be seen whether the share prices will trail significantly in the coming days after the rally they experienced.