Merrill Lynch Global Wealth Management's B2B Internet Holdrs may be the target of a reported insider trading probe, according to research conducted by IndexUniverse.com.
On Wednesday, FT.com reported that the Securities and Exchange Commission is investigating whether Wall Street traders are using ETFs to hide insider trading. Specifically, the agency is looking at “ETF stripping,” in which a trader takes long positions in one stock in an index-based ETF and shorts the rest of the stocks in the portfolio, according to the report.
But ETF stripping would be very expensive and time-consuming, according to ETF experts. For one thing, the trader would have to pay the costs — including the management fee — on the ETF on which it were taking a long position. At the same time, the trader would have to pay commissions and margin interest on the positions it were shorting.
Most likely, the target of the SEC's insider trading probe are those high-volume ETFs with very concentrated holdings — which would result in lower costs and hassle for traders, said another ETF executive, who asked not to be identified.
Trading patterns in one exchange-traded product, BBH, which has only two holdings — Ariba Inc. Ticker:(ARBA) and Internet
Capital Group Inc. Ticker:(ICGE) — seem to indicate possible insider trading, according to IndexUniverse.
No allegations of wrongdoing have been leveled by any regulator, however. Indeed, the SEC has yet to confirm that it is conducting any investigation of potential insider trading using ETFs. Florence Harmon, an SEC spokeswoman, declined to comment on possible probes into insider trading via exchange-traded funds. Merrill Lynch officials declined to comment about the story. A call and e-mail to Ariba's press office were not returned by press time.
BBH was one of the Holdrs products created during the dot-com era. While these products trade on the exchange and are registered with the SEC, they are trust-issued receipts, not '40 Act ETFs. They are static and don't have creations and redemptions like traditional ETFs.
Since BBH has only two holdings — Ariba stock makes up 91% of the vehicle — it might make a perfect target for traders who may have had information on Ariba's financials before the company announced earnings Jan 27, Mr. Nadig wrote in his piece.
During its earnings call, Ariba, which develops spending management software, reported net income of $42.1 million for the fourth quarter, compared with $2.2 million for the comparable period the previous year. Revenue rose 20% to $90.4 million, from $75.2 million in the year-earlier period. Wall Street analysts had forecast revenue of $86.7 million.
While volumes on BBH jumped in the wake of the earnings call, hitting 600,000 shares Jan. 28, trading also increased dramatically in the weeks leading up to Ariba's earnings call.
The number of outstanding shares jumped from 5.8 million on Dec. 15 to 7.3 million by Jan. 31, according to IndexUniverse.
“It seems inconceivable to me that the 600,000 in volume, and previous high-volume days in the month or two prior to the Ariba surprise, weren't the function of someone with an inside peek and a [clearly misguided] belief ,” Mr. Nadig wrote.
