Interesting collateral question

As in the saying “things may go wrong but life goes on,” prices of certain stocks continue to go up like it is always business as usual even while the market is in some kind of trouble. One example is the market performance of Ionics Inc. (ION).

The price of Ionics has been relentlessly going up despite the market’s general downturn. It’s now the subject of a market play by retail range traders.

There is, however, an interesting collateral question raised in connection with the ongoing stock play. It is whether or not acts of insider trading have been committed in the process.

Trading play

The stock play on Ionics seemed to have started on Sept. 4 when its shares opened at a high of P0.58. Ionics’ stock price had been trading 20 percent lower in the last few years.

That day, the price of Ionics shares soared by another 15.5 percent from opening price and hit the session’s high of P0.67 per share.

Not long after, it started to face stiff selling pressure on profit taking. The selling pressure drove down its price to the day’s low of P0.54 and settled at P0.55 by the close of trading.

Transaction volume and total value turnover were both exceptionally high, which carried a sprinkling of selling transactions from foreign investors.

On Sept. 7, transaction volume and total value turnover for the stock fell drastically, although Ionics shares traded at new levels as follow: it opened at P0.56, hit the high of P0.58, dropped to P0.55 and moved sideways until closing.

Ionics’ transaction volume and total value turnover bounced back the following day, Sept. 8. Its share price opened at P0.55 (the day’s low) and closed at the session’s high of P0.65.

On Sept. 9, Ionics transaction volume soared eight times and its value turnover rose 10 times. After opening at the previous day’s closing price, its share price rose by another 26.15 percent to P0.82 and closed at P0.81.

In the next three trading days, Ionics’ stock price lingered within these levels until Sept. 15 when it rose by 20 percent to break P1.

In the succeeding trading days, Ionics share prices further rose by as much as 50 percent daily on good volume and substantial value turnover that by Sept. 24, it hit P3.27 a piece.

Since Sept. 4, therefore, Ionics’ share price gained by as much as 581.25 percent.

Worth noting, too, foreign investors did not have any subsequent selling activity after their Sept. 4 sell-off.

Bottom line spin

Foreign investors appear to be better than local investors in culling the latest market news or company developments. They are often seen ahead of local investors in meaningful stock plays.

But in the case of Ionics, foreign investors sold rather than bought when its shares started to sizzle on Sept. 4.

As they did not have selling transactions since then, they may have been clueless as to what was going in the company. And they could not have committed any act of insider trading, as well.

On the other hand, records showed that some company officials were already buying Ionics shares—though in small quantities—just before the initial kick off on Sept. 4. These transactions were, at the same time, properly reported. They were also published accordingly on the PSE website.

When these disclosures were noticed, some wondered if such buying transactions constituted acts of insider trading.

The answer is yes and no. As qualified in rulings already promulgated, “insider trading can be illegal or legal depending on when the insider makes the trade.”

It’s illegal when the material information is still “nonpublic.” It is considered unfair for someone to trade on information that is still hidden from the investing public.

Insider trading also extends up to the act of “tipping others” of the special knowledge yet undisclosed publicly.

Insider trading becomes legal when the material information is made public, “at which time the insider has no direct advantage over other investors.”

In this connection, the SEC requires the “commonly-known-insiders” to report all their transactions, which are consequently published on the exchange’s website.

Company officers, directors and stockholders with 10 percent or more holdings are the usual “commonly-referred-to-insiders.”

Under the rulings, insiders could also be “other people such as stock brokers, the company’s investment bankers, lawyers or proxy printers and even family members of company personnel.”

In several studies conducted, insiders’ reports provide significant signals. Stocks exhibiting heavy insider selling tend to subsequently under perform, while stocks which have heavy insider buying perform significantly higher than average returns.

So, the next time you notice heavy insider buying activity on a stock, stop complaining. Instead, start buying for the stock will soon perform well like in the case of Ionics. Likewise, sell in case of insider selling activity.

(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com)