Late last week, just a few days before Rona Inc. went public with Lowe’s takeover offer, the retailer’s stock shot higher.
On July 26, the very same day that Rona told Lowe’s ‘thanks, but no thanks,’ about 4 million of its shares traded on the Toronto Stock Exchange, marking its second-highest single daily volume in 2012. The company’s stock then popped, climbing about 7 per cent before the big news Tuesday morning.
Any skeptic would think this looks pretty suspicious.
But it turns out that there’s a decent chance the activity wasn’t the result of someone positioning based on inside information. And the stock’s ascendance afterward was probably the result of people speculating once they saw a big order they knew nothing about.
By all means, a 4 million share order for Rona – totalling about 3 per cent of its outstanding shares – is big, but traders say the activity was likely the result of what they call a ‘derivative print,’ which means the stock was bought and sold as part of a swap contract.
In Canada, it’s common to see low-dividend, easy to borrow stocks like Rona as part of a basket of stocks that are bundled to create products such as total return swaps. Although these swaps have expiry dates, they are often rolled over again because the client wants to continue the swap, often for tax purposes. When that happens, the shares are bought and sold, but never really change hands.
Rona’s big trade last Thursday was facilitated by BMO Nesbitt Burns, according to Bloomberg, and it just so happens that about 10 other names, including Teck Resources and CGI Group also had bigger than normal trading activity coming out of BMO that day – likely because they were part of the same basket. The trades also all went through right when the market opened at 9:30, and it would be rare to see a big, non-derivative trade executed the second the market opens.
Plus, keep in mind that anyone who was trading on inside information would want to hide their activity, rather than put it on display in a massive order that everybody else saw.
Assuming this is true, the rising stock price after the big trade likely occurred because people were following what they assumed was a herd. In Canada, derivative prints for things like swap contracts look just like a regular stock trade to the average user, so someone who didn’t know better could assume it was stock changing hands rather than a swap contract expiring.
However, there’s always the chance that this could be some sort of foul play, and the regulators will look into it. The Investment Industry Regulatory Organization of Canada couldn’t provide much comment, but a spokesperson said that “it is standard practice for IIROC to review trading activity preceding the announcement of a takeover bid or other material disclosure.”