Big investors who want to sell a piece of stock have a problem: placing the order on a public stock exchange will drive up the price. So they hire an investment bank that buys the shares and then resells them to other investors, pocketing the difference.
At the beginning of a block trade, bankers have valuable information ready. They know that a sell-off is coming, which will likely cause the stock to fall once it’s released. The U.S. Department of Justice and the Securities and Exchange Commission are investigating whether banks have tipped their top clients to step in and sell ahead of this wave, the Wall Street Journal reported.
As this investigation continues, the Journal decided to examine these trades and see if any patterns emerged.
There is no comprehensive, public database of these occupations. Some are registered with the SEC. Others can be found in other company records. Some leave no paper trail at all.
Relying on lists maintained by two research firms, IPO Boutique and Dealogic, the journal compiled a list of all known block trades between July 1, 2018 and June 30, 2021, three years prior to that date which the official investigation has apparently taken place has begun in earnest. MorganStanley,
which appears to be the focus of the investigation, has announced that it received a request for information from the Justice Department last August. The bank declined to comment.
For registered trades, the Journal read prospectuses filed with the SEC to identify the selling shareholder, the bank or banks that made the trade, the date of execution, the price the bank paid for the shares, and the price at which they were transacted were resold to investors. For unregistered deals, the Journal reviewed SEC property filings, where available, to determine the same information.
The Journal compiled the details of 393 block trades and then attempted to determine whether stocks were underperforming the market just before the stocks were sold.
Using price data from S&P Global Market Intelligence, the journal calculated the percentage change in each share’s price from the previous day’s market just before the 4:00 p.m. close of trading on the day that one or more banks agreed to buy the shares.
The journal then adjusted these price changes to reflect the general direction of the markets on the days in question. S&P Global Market Intelligence categorizes publicly traded companies into one of 11 sectors, and S&P Dow Jones Indices calculates daily index values for the constituents of each sector in the S&P 500. The journal used the daily movement of these indices to calculate a market-adjusted return for the index block trade stocks.
We also calculated where each company’s share price would have closed if it had matched the performance of its sector, and then used that value to determine how much more or less the selling shareholder would have received if the sale was on that one price would have been based.
On August 7, 2018, Morgan Stanley agreed to purchase a package of 20.6 million Kraft Heinz co
Shares of 3G Capital for $59.85 each, a 2.4% discount to the stock’s close of $61.32, ticker KHC, which was down 1.6% from the previous day’s close.
S&P Global Market Intelligence ranks Kraft Heinz as a consumer goods company. On Aug. 7, 2018, the S&P 500 Consumer Staples Index closed down 0.60%, giving Kraft Heinz a market-adjusted daily return of -1%.
If Kraft Heinz’s share price had mirrored the performance of the consumer staples sector and fell 0.6% instead of 1.6%, it would have ended the day at $61.95. If Morgan Stanley had received the same 2.4% discount on that price, the bank would have paid $60.50 per share.
The difference between what Morgan Stanley would have paid if Kraft’s stock price had reflected the sector and what the bank would actually have paid is 65 cents a share, or about $13.4 million more than would have received 3G.
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