The JSE: Looking beyond ‘short and distort’ tactics
Lessons to learn from recent share-price disasters
In just two short months the JSE has had the Steinhoff disaster and the short-selling runs on Aspen, Capitec and Resilient shares, fuelled by reports (or rumours of reports) from Viceroy and others accused of “short and distort” tactics.
The events have raised questions about where the JSE’s role as regulator of both issuers and investors begins and ends, as well as about the regulation of dual listings, and about what is legitimate research – and what is not.
Steinhoff brings all the themes together. When its share price started sliding in early December, even before the board revealed that it was investigating “accounting irregularities” and that Markus Jooste had resigned as CEO, the JSE came under pressure to suspend trading; it faced further pressure to suspend the share when the company failed to produce year-end results within the required four months.
That was even more so because market players asked why the JSE had threatened to suspend Eskom’s bonds by the end of January if the power utility did not publish interims within the three-month timeframe for interims. There have also been questions about the extent to which Steinhoff breached listings requirements by publishing results over the past three years (at least) that we now know were misleading.And then there are the issues about Viceroy’s report and conduct and whether regulators should have intervened in such issues – questions that became more pressing as Viceroy and other short sellers such as 36One Asset Management disseminated reports with the intention of trashing the share prices of Capitec and Resilient so that they could profit off this.
A whole debate about “short and distort” research and trading has opened up. And though short selling and long buying are legitimate and important parts of price discovery in the market, as is research by analysts, the consumers of that research should beware and regulators would have a role if reports amount to deliberate market manipulation.
JSE CEO Nicky Newton-King and her regulatory lieutenants have devoted a great deal of time to frequent meetings with the companies concerned, and a great deal of thought to the thorny regulatory questions involved.Whatever the rules and regulations might say, this is a “moment”, as Newton King sees it, in which regulators, boards of directors, auditors and shareholders must all look at what kinds of signals they need to learn to spot to prevent disasters such as Steinhoff. The too-powerful CEO might be one example.
The JSE is the primary regulator for the companies that issue equities and bonds through its listings requirements, and it has trading rules for its members as well as extensive (and expensive) systems in place to scrutinise trades. But it’s the Financial Services Board’s Directorate of Market Abuse which is the primary regulator of market conduct, and to which the JSE passes the information it gathers on any suspicious trading. The legislation criminalises three kinds of market conduct: insider trading, market manipulation, and making false and misleading statements.Added to that is another layer of regulatory complexity when it comes to dual listings such as that of Steinhoff, which migrated the primary listing of its Netherlands-registered top company to the Frankfurt Stock Exchange in 2015. Though the JSE’s rules are aligned with those of the world’s major exchanges, and it works closely with its peers, each bourse tends to have its own nuances. If Frankfurt wasn’t suspending Steinhoff NV, the JSE wasn’t going to either, though it could suspend the listings within the Steinhoff group that were JSE-only. Suspending in Johannesburg while shares were still trading in Frankfurt would have disadvantaged the local shareholders on the South African register.
Generally speaking, says Newton-King, “closing a market just removes transparency in pricing – the general thrust of how we regulate is to ensure we are getting whatever information is available out to the public so that they can make up their own minds”. Steinhoff put out more than 30 SENS announcements in the first month, she notes.
Suspending the share is different to the trading halts which the JSE’s systems are programmed to impose automatically, albeit briefly, if “circuit breakers” are tripped. These are designed to let the market take a breather if prices are moving very rapidly, so traders can decide whether they want to trade. Since December 4, Steinhoff has triggered 87 circuit breakers and eight price monitoring extensions, JSE statistics show.
As more details of the Steinhoff backstory emerge, the market will ask questions about how Steinhoff’s grand deceptions could have been so hidden from the public financial statements. The JSE has already been asking those questions and has had its financial experts take an intense look at the public statements. They have found nothing.