'Watch risks on futures'

Johannesburg - The collapse of a highly geared single-stock futures contract involving shares in a JSE-listed technology company should serve as a fair warning to traders who take on highly leveraged positions.

So said GT247 risk analysis head Andrew Kingsley, following news that CovergeNet executives were forced to exit future contracts on Wednesday after unusual trading activities in their company's shares.

Michelle Krastanov, a non-executive director of ConvergeNet, told Fin24.com that the company believed there had been some questionable trades in its shares in recent weeks and had asked the JSE to investigate. The JSE had done a preliminary investigation into the trades but had not found grounds for further investigation.

She said: "It would appear as if there were some trades coming in late in the day that were not reflective of what was happening in the market during the rest of the trading day."

On January 5, a trade went through at a price of 80c per share, whereas the share had been trading at 100c or higher for the rest of that day. On January 6, another trade of 28 shares went through at 70c, once again well below the traded share price.

However, Kingsley said these kind of problems are a result of excess leverage in the position.

He said: "To have your initial margin start at 8c and move to 27c would indicate that the holder was woefully under-margined."

Initial margin is the "deposit" required by the SA Futures Exchange (Safex) that the holder is required to keep on hand at the close of each day to prove they can cover their open positions.

Take note

Kinsey said that if SSF holders held such large positions in a relatively illiquid stock, they would have been better served going to the bank and negotiating a more reasonable level of initial margin over the period. This would have prevented a cash flow or liquidity crisis for the holder.

During late December and early January, volumes are often significantly lower on exchanges as many traders wrap up for the year. This often results in wider "spreads" between the prices asked by buyers and sellers - which may result in share prices moving around sharply over this period.

Traders who are on the ball with "cheeky" bids at the lower end of the market may often use these times to pick up shares in listed companies at well below the average market price.

"Once your position becomes publicised and people know that your hand is weak, they may try to act on it," said Kinsey.

Traders may attempt to short-sell highly leveraged positions, forcing others who don't have sufficient cash on hand to exit positions at deep losses.

"It will be interesting to see whether these trades stop now that these positions have been exited," said Krastanov.

ConvergeNet continued to trade down on Friday, losing another 11% to trade at 80c.

- Fin24.com