Johannesburg - Did high-risk trading in gold and uranium company Simmers & Jack Mines and telecommunications company Vox Telecom undo Dealstream? That's the speculation among traders in Johannesburg who believe the trader suffered a R110m combined loss on the two stocks.
Dealstream is a Melrose Arch-based derivatives trading company that offers investors opportunities to trade single-stock futures (SSFs) and contracts for difference (CFDs) via its web-based platform. The company is one of South Africa's largest CFD traders and, in this capacity, it has concluded many over-the-counter (OTC) CFDs with its clients.
"That's what we've heard," said an unnamed trader who contacted Fin24.com.
Since September 8 2008, Simmers & Jack Mines has lost 33% of its market value, falling from a high of 399c to 260c. The share price has subsequently rebounded 5.6% or 15c during trade on Monday on the back of stronger equity markets.
Over the same period, the Vox Telecom share price has moved significantly. Since the 8th, the share price has moved from a low of 198c to hit a high of 225c. On Thursday last week the share traded down around 5% (10c) and lost another 9% (20c) on Monday to trade at 200c.
Stuart Elliott, financial director at Merafe Resources, which produces ferrochrome, showed on Friday how easy it is to get in a fug when trading the futures markets in these volatile times.
According to a Sens announcement last week, Elliott suffered a R5m loss after so-called capitulation selling as he was forced to exit a futures contract taken on Merafe Resources.
Elliot entered the position with the share price trading at R2.92 and he exited the position with the share price trading at R1.69. On 41 100 futures contracts, this resulted in a loss in excess of R5m.
Single-stock futures allow traders to take geared positions on underlying shares and benefit when the share prices move up. At the end of each trading day, single-stock futures are 'marked-to-market' and if the share price has moved down then the trader is required to pay over a margin to cover their position.
If the margin gets too big and the trade goes against the trader for an extended period of time, the trader may suffer big losses.
A similar situation occurred at Global Traders European operations earlier this year that resulted in the business being closed down.
Dealstream
CFDs are not standardised agreements, and are, in essence, an over-the-counter contract between two parties (Dealstream and its client) stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at the expiry date stipulated in the CFD.
The company is run by Russell Leigh, a regular market commentator for many of the financial publications.
The company includes Argil Venture Capital (Argil) as an investor. Argil is a fund manager owned by auditing firm Ernst & Young Southern Africa and Worldwide African Investment Holdings. Argil's first fund is an innovation and technology fund, which was launched with R100m in investment capital.
"As the contracts signed were over-the-counter contracts between Dealstream and its clients that are neither concluded on the JSE nor regulated by the JSE in terms of its rules, neither Rand Merchant Bank nor the JSE will be liable for Dealstream's failure to meet its commitments to its clients," Allan Thomson, the JSE's head of derivatives trading, said in a statement.
"CFDs are not regulated by the JSE, and the JSE has been warning the market for some time now about the very unnecessary risks that clients face with CFD contracts," he said. Had Dealstream's clients registered their respective positions as single-stock futures contracts with the JSE, the contracts would have simply been transferred over to a another member and their positions and their funds would have been secured."
Fin24.com's attempts to contact Paul Dixon of Argil via telephone or e-mail have so far produced no response.
After requests from readers to investigate Dealstream, Fin24.com attempted telephonic contact via office and Leigh's mobile numbers with no luck. A visit to the Dealstream offices revealed that nobody was home.
"What is disconcerting is the lack of information from the company," said one investor who contacted Fin24.com.
According to one investor, warning flags were raised last week: "Last Wednesday afternoon the system was online but trades were not going through. Dealstream said it would enter them for us but one could not see if trades went through or not. Thursday was the same. By Friday afternoon, the system went offline 'due to technical difficulties' and this morning the site remained offline."
- Fin24.com