Big Stock Sales Are Supposed to Be Secret. The Numbers Indicate They Aren’t. via /r/wallstreetbets #stocks #wallstreetbets #investing

Big Stock Sales Are Supposed to Be Secret. The Numbers Indicate They Aren’t.

Share prices fall ahead of 58% of large sales, a WSJ analysis finds. Regulators are investigating.

Excerpts for anyone who can’t open article

Before a big shareholder could carry out plans to sell a slug of stock, the price dropped. It was as if other investors knew what was coming.

It happened when Bain Capital sold shares of Canada Goose Holdings Inc., the maker of trendy parkas; when 3G Capital sold stock in Kraft Heinz Co. ; when Apollo Global Management Inc. sold shares of Norwegian Cruise Line Holdings Ltd. ; and when Alaska’s state oil fund trimmed its stake in an artificial-intelligence software firm.

These transactions, known as block trades, are supposed to be a secret between the selling shareholders and the investment banks they hire to execute the trades. But a Wall Street Journal analysis of nearly 400 such trades over three years indicates that information about the sales routinely leaks out ahead of time—a potentially illegal practice that costs those sellers millions of dollars and benefits banks and their hedge-fund clients.

The Journal’s analysis, covering 393 block trades between 2018 and 2021, found that 58% of the time, the share price declined in the trading session immediately beforehand, controlling for the performance of peer companies. Of the 268 trades for which the Journal was able to determine how much the banks paid, the sellers would have received $382 million more if the stocks had performed in line with the benchmark, or about $1.4 million per trade.

Wall Street thrives on information edges, and at the beginning of a block deal, the bankers are holding a valuable nugget: They know that a wave of selling is likely on the way. That is because public shareholders, assuming that corporate insiders are better informed, tend to copy their trades. A flood of shares for sale also knocks the supply-demand balance out of kilter.

Regulators suspect that investment banks have been tipping off their top clients, who jump in and sell ahead of that wave, according to people familiar with the probes. In many deals examined by the Journal, the stock-price slide began in late morning or early afternoon, around the time sellers typically alert bankers to their plans.

The investigation for now appears to be focused on Morgan Stanley, MS -1.34% the dominant bank in block trading in recent years. The firm disclosed later in February that it had been responding to information requests from the Justice Department since the summer. In November, it put one of its senior executives in charge of block trading, Pawan Passi, on leave. A Morgan Stanley spokeswoman declined to comment on Mr. Passi’s behalf and repeated attempts to reach him have been unsuccessful.

Submitted March 30, 2022 at 04:34PM by its_me_cindy
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