CHART: Elite Investors Are Selling Their Stocks Days Before Broker-Analyst Downgrades

Australian market analysts are ‘leaking’ their stock analysis reports to privileged clients days in advance to boost trading volumes and commissions they receive, new research has revealed.

Researchers from the Capital Markets Cooperative Research Centre (CMCRC) studied 3,800 analyst recommendations on 338 ASX-listed stocks to determine the effect of analyst recommendations on trading volumes.

They found ‘spikes’ in trading volumes by broker-analysts who were due to release a report in the days prior to its public release.

The effect was more pronounced in small and medium cap stocks. Downgrade recommendations sparked 80% more activity than upgrades, according to the CMCRC research.

CMCRC CEO Michael Aitken said the practice of tipping off elite clients was not illegal, but it offered “an advantage to those in the know”.

“Since smaller stocks have less analyst coverage, it is likely that analyst recommendations in these stocks provide new information to the market which provides greater profit potential from ‘tipping’ activities,” Aitken said.

“We also noted that a direct relationship exists between recommendation changes (from buy to sell or vice versa) and volume, as significant changes in trading volume eventuated from recommendation changes.”

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