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Cape Town - There is evidence - although circumstantial - that if someone was front running President Jacob Zuma's recall of former finance minister Pravin Gordhan from his overseas roadshow, someone knew about it and made money from it, according to analyst Stuart Theobald of Intellidex, which researches capital markets.
In stock market terms, front running is defined as the practice by market-makers of dealing on advance information provided by their brokers and investment analysts, before their clients have been given the information.
At about 10:30 on March 27 the news broke that Zuma had “recalled” Gordhan from a roadshow in London where he was pitching SA’s capital markets to international investors. That led to an immediate and sharp fall in the rand.
Theobald's research showed there was a clear leap on the day Gordhan was recalled in two foreign exchange futures contracts open on the JSE, namely that of June 2017 and December 2017. There was a 15% increase in the number of June contracts and a 167% increase in the number of December contracts on that Monday.
Essentially one buys futures which gives you long exposure to the dollar. Then, if the dollar appreciates relative to the rand, you get to keep the difference.
"For one thing, the volume in the June contract, where most of the action was, spiked early on Monday morning. There is also a lot of action around 10.30 when the news broke and a large sale on Tuesday afternoon," said Theobald.
"This assumes that the contracts were opened before the Gordhan news broke. There is circumstantial evidence supporting the view that it was before the news."
READ: Zuma batters SA's credibility by ordering Gordhan home
His research shows that the movements in open interest were in those two contracts specifically. There was no similar movement in other dated contracts or in contracts involving other currencies like the pound.
"If this was a general post-news market movement, I would expect contracts at all dates and all currencies to move," explained Theobald.
He added that it is not clear whether any particular laws would have been violated, but still regards it highly unethical.
"Insider trading rules are currently focused on company shares rather than foreign exchange. This was technically a derivative being traded on the JSE, so it may be covered by insider trading rules for that reason, but if it's just treated as a currency exposure, there may be a gap in the regulations through which these traders could slip," noted Theobald.
"Either way, using JSE-listed instruments was a pretty dumb move. A trader wanting to profit from such advance knowledge would be better able to do it offshore, where it is much harder to see big movements in market exposures."
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