As mentioned in Chapter 1, the market capitalisation of the Australian Securities Exchange (ASX) is approximately A$1 trillion as at April 2009. The investors in this market range from individual retail investors, investment funds and superannuation funds, foreign investors (individuals or funds), companies and principal traders with investment banks.
Lucy (2007) comments that Australia’s funds management industry is one of the most sophisticated in the world, and with an investment funds pool size of US$700 billion, it is the largest in Asia and fourth largest in the world. Australia’s per capita average of investment in managed funds is valued at close to A$50,000, dwarfing all other nations (including the United States by 20 per cent) and reflecting an increase of around 115 per cent over the last five years.
Industry funds are anticipated (according to projections performed by Rice Warner Actuaries as at June 2008) to grow from a share of the total superannuation market of 19.0 per cent to about 25.7 per cent by 2023 (K. Boag, pers comm.). The Self
Managed Super Fund (SMSF) market is forecast to remain the largest segment at 26.2 per cent in 2023 but will grow slightly less strongly than the industry fund market. Together these two segments will represent over 50 per cent by 2023 of a
total forecast market of $4.77 trillion in nominal dollars. The remainder is dominated by the traditional life company/bank owned super funds with small contributions from public sector and retail funds.
In 2003, the ATO (2003) reported that SMSFs comprised 20 per cent of the
superannuation industry and, at 31 December 2003, had approximately $125 billion in assets under management. At that time there were around 300,000 self managed super funds, and the number of funds was growing at a net rate of about 2,200 per month. The average account balance of a self managed super fund is $235,000 and membership generally comprised either one member (21 per cent) or two members (65 per cent).
While recent data are unavailable on the growth of SMSFs from the ATO, the earlier projections forecast that they will represent around 25 per cent of funds under
management in 2023 and have an increasing presence in the market.
Both direct retail investors and investors with SMSFs are likely to have different investment philosophies and flexibility in comparison to traditional industry and life insurance/bank owned funds and this has changed the trading activity evident in some market segments. This is particularly the case in the junior and mid-tier parts of the resource sector during the recent five year resources rally and which has involved increased higher risk investment as well as short-term trading.
2.4.3 Short-Term Trading
Over the last 10 years, the presence of the ‘day trader’ has influenced market trading patterns, particularly in some small to mid-sized resources companies. A ‘day trader’ typically uses internet based market data which can provide real time prices and an executable transaction platform. More sophisticated traders can utilise software which is designed to quickly identify emerging favourable share price trends.
Transactions are executed quickly and efficiently and can be subsequently closed out within minutes if desired but many are closed out by the end trading for a particular day to avoid the risk of adverse NYSE movements overnight. Hence the important aspect of the ‘day trader’ is that he can capitalise on small profits quickly if there is a
belief that a stock price will move up (shorting is uncommon). An example of the influence of substantial ‘day trading’ is evident with the reporting of encouraging drill intersections by De Grey Mining Ltd on the 6th December 2003 (De Grey Mining, 2003). The encouraging drilling intersections were part of an exploration program investigating an early stage project which required further drilling to determine whether there was any potential for economic levels of mineralisation present. The total turnover on the day of the announcement and the subsequent two days totalled approximately 75 million shares. This contrasts with a total 59 million shares listed on the ASX by the company. Evidence of share price churning by traders is the fact that around 59 million shares were traded during a period when the share price increased by around 125 per cent and it is estimated that in most trades profits were sought in the 10 per cent to 50 per cent range.
In a recent sample, Bartrop (2009a) noted that strong promotion of its Carnarvon Basis offshore Artemis Project by MEO Australia (ASX Code: MEO) had led to a strong increase in the share price and turnover of MEO rising from less than 10 cents to over 50 cents on daily volumes of several million share and up to in excess of 40 million shares on a number of occasions. The market capitalization of MEO provided a ‘see through’ valuation of the Artemis project, which could be applied to its joint venture partner, Cue Energy (ASX Code: CUE). However, this valuation suggested that Cue’s other assets had a market valuation close to zero but in reality represented valuable producing interests in Oyong oil, Maari oil, the Oyong and Wortel gas projects and the company’s PNG interests. Cue Energy had not been actively promoting its Artemis project interest given its focus on its more advanced projects.
Tate (2001) outlines the impact that traders can have on share price movements which include:
• Trends are the cornerstone of trading and it is impossible to trade against the trend.
• A controllable risk is the ‘time in the market’ which should be minimised.
The ‘day trader’ has heightened volatility when there is positive news flow and the stock exhibits signs of a momentum run. In many cases there is a ‘pull back’ in the share price at the end of the day as a number of positions may be closed out. The
outcome can be a greater dissociation of a share price from the fundamental value of the company and reducing other investor confidence in the robustness of this
fundamental value.