Big stock sales are supposed to be secret. The numbers indicate they are not.

For years, odd things kept happening on Wall Street.

Before a major shareholder could execute plans to sell a piece of stock, the price fell. It was as if other investors knew what to expect.

It happened when Bain Capital sold shares in Canada Goose Holdings inc,

the manufacturer of trendy parkas; when 3G Capital sold shares in Kraft Heinz co

; if Apollo Global Management inc

Norwegian Cruise Line Holdings shares sold GmbH.

; and when Alaska’s state oil fund reduced its stake in an artificial intelligence software company.

These transactions, known as block trades, are said to be a secret between the selling shareholders and the investment banks that hire them to execute the trades. But a Wall Street Journal analysis of nearly 400 such trades over three years shows that information about the sales routinely leaks in advance – a potentially illegal practice that costs these sellers millions of dollars and benefits banks and their hedge fund clients.

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

A handful could be explained by a negative headline or blamed on bad luck. But the persistent pattern of falling stocks in the run-up to big insider sales points to a more widespread problem: information that should be confidential is leaking out.

Sell ​​low

Morgan Stanley executed the most block trades in a three-year period, and those stocks underperformed their peers by the widest median margin on the day of sale, according to analysis by The Wall Street Journal.

On everyone’s day

Morgan Stanley’s

174 block trades,

the stock sold

fell below his

Benchmark index of

0.7 percentage points

on a median basis.

blank

On everyone’s day

Morgan Stanley’s

174 block trades,

the stock sold

fell below his

Benchmark index of

0.7 percentage points

on a median basis.

blank

On everyone’s day

Morgan Stanley’s

174 block trades,

the stock sold

fell below his

Benchmark index of

0.7 percentage points

on a median basis.

blank

On everyone’s day

Morgan Stanley’s

174 block trades,

the stock sold

fell below his

Benchmark index of

0.7 percentage points

on a median basis.

blank

On everyone’s day

Morgan Stanley’s

174 block trades,

the stock sold

fell below his

Benchmark index of

0.7 percentage points

on a median basis.

That pattern is now the focus of a federal probe into whether banks alert preferred customers to upcoming block trades. The Securities and Exchange Commission has requested trading records and electronic communications from a number of large banks and hedge funds, and the US Department of Justice is conducting its own investigation, the Journal first reported in February.

The investigation appears to be focused on Morgan Stanley for now,

WOMAN -1.71%

the dominant bank in block trading in recent years. The firm later announced in February that it had been responding to requests for information from the Justice Department since the summer. In November, one of the senior staff in charge of block trading, Pawan Passi, was furloughed. A spokeswoman for Morgan Stanley declined to comment on Mr Passi’s behalf and repeated attempts to reach him have been unsuccessful.

Goldman Sachs Group inc

has also received inquiries from regulators, the Journal reported.

The probe, along with a broader market decline, has cooled the big business of block trading in recent months, bankers and investors said.

The Journal’s analysis found that when Morgan Stanley executed a block trade alone, the median stock underperformed its peers by 0.7 percentage points in the trading session leading up to the deal, meaning half underperformed. This was the worst record for any of the largest banks that are major players in block trading. The median of Credit Suisse Group AGs

Deals underperformed by 0.4 percentage points, the analysis found. The middle trades executed by Goldman and Barclays PLC roughly matched the market.

Across all banks, the median of the stock lagged behind by 0.2 percentage points.

Morgan Stanley, Credit Suisse, Goldman and Barclays declined to comment. The other companies and investors mentioned in this article declined to comment or did not respond.

blank

Morgan Stanley has been the dominant bank in block trading in recent years.


Photo:

LUCAS JACKSON/REUTERS

Leaks can come from a number of sources. Businesses tend to approach multiple banks to bid on block deals, leaving open the possibility that someone other than the winner of the deal leaked the information.

There is no comprehensive public list of block trades. Some are registered with the SEC. Others can be gleaned from more obscure company records. Many leave no trace at all. The Journal’s analysis drew on databases maintained by market research firms IPO Boutique and Dealogic, as well as information from market participants, and cross-checked details of these trades with securities records where possible, but the list is likely not exhaustive.

Insiders looking to sell a stock face a problem: placing the order on a public exchange would likely depress the price. So they turn to Wall Street.

An investment bank typically agrees around midday to quietly buy the shares later in the day at a discount to the market’s closing price. The bank then attempts to pass the stock on to its trading customers at a higher price and pocket the difference. It’s a club world: Four or five banks do the vast majority of the trades, and according to the data and market participants, the same list of hedge funds are lining up to buy the shares.

Wall Street thrives on information advantage, and at the start of a block deal, bankers have a valuable nugget: they know a sell-off is coming. That’s because public shareholders, assuming company insiders are better informed, tend to copy their trades. A glut of stocks for sale also throws the supply-demand balance off balance.

Regulators suspect investment banks have been tipping off their top clients to step in and sell ahead of this wave, according to people familiar with the investigations. In many of the deals examined by the Journal, the slides began in the late morning or early afternoon, around the time sellers usually alerted bankers to their plans.

The final losers in such situations are often pension funds, endowments and endowments. They invest in private equity firms that use block trades to sell off stakes in newly listed companies.

Bain Capital, which lost $33 million after Canada Goose shares fell in the final hours of trading before selling some of the shares, includes Indiana teachers and Los Angeles city workers among its investors, according to public records. Pension funds are also big investors in Boston-based TH Lee Partners, which missed at least $31 million in revenue from five block trades between 2018 and 2021 due to unexplained price declines, trade data show.

Block trades can be risky. Banks compete to buy the stocks at small discounts, and if they misjudge investor demand or experience a sudden, unexpected drop, their profit margins can quickly evaporate.

This creates a financial incentive to disclose details ahead of time. Knowing which investors are going to buy the shares and at what price could help a bank optimize its offering and reduce its downside risk. And steering top funds into a profitable trade — shorting a stock en route to a block sale is usually a win — could curry favor with key customers.

There are other reasons a stock might fall before a block trade. When a company goes public, employees and early investors are typically restricted from selling their shares for a period of time, usually six months. Hedge funds know when these so-called lockups expire and often sell the stock early.

But fewer than 20 block trades in the journal’s list appear to involve expiry of IPO locks, and they only marginally underperformed the others. In the vast majority of examples, there was no obvious reason for the stock to underperform.

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Most are similar to what happened to 3G Capital, a private equity firm known for its investments in household brands. Between 2018 and 2021, 3G executed at least three block trades to reduce its stakes in two of them – Kraft and Restaurant Brands International inc,

the parent company of Burger King. Each time it asked Morgan Stanley to sell the shares, and each time the price moved against it.

On August 7, 2018, shares of Kraft rose all morning, outperforming the S&P index of other big consumer goods companies. At 12:26 p.m. – the exact time that block traders usually book banks – the stock price began to fall sharply. It closed down 1.6%, underperforming the index and costing 3G Capital about $13 million in lost revenue.

In another 3G block trade a year later, Restaurant Brands shares fell midday and closed down 1.8% on a day when the index was up. The notoriously tight-fisted investment firm — which pioneered cost management and requires employees to obtain color copying permission — lost $56 million in revenue, according to the Journal’s analysis.

write to Liz Hoffman at liz.hoffman@wsj.com, Corrie Driebusch at corrie.driebusch@wsj.com, and Tom McGinty at tom.mcginty@wsj.com

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https://www.wsj.com/articles/big-stock-sales-are-supposed-to-be-secret-the-numbers-indicate-they-arent-11648647914?mod=rss_markets_main Big stock sales are supposed to be secret. The numbers indicate they are not.

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