Stanley Gibbons Share Discussion Threads

[gengulphus] 02/8/2004 15:56

popgunn,

Have taken a long weekend, so have only just seen your follow-up questions...

"The other question then is whether you could for a short term profit buy the ex-div drop, foresaking the divi in return for a lower price, and sell on the rise back to the cum-div price. That assumes the price rises as predictably as it falls, which may or may not be the case."

Good question, and I think the answer is "probably not".

In theory, a share price rises gradually as the company makes money, and drops abruptly on each ex-dividend date as it pays the money out, producing a "sawtooth" pattern - all adjusted for things such as the price dropping gradually rather than rising gradually if it is losing money rather than making it, or the pattern slowly rising if the company is retaining earnings. If the share price actually did this, you wouldn't be able to make any more money trading the ex-dividend dates than you could simply holding the shares.

In practice, the share price moves around a lot for all sorts of other reasons - tips, rumours, the company announcing that it is making money faster or slower than people thought it was, or being in a fashionable or unfashionable sector, or whatever. If the share price behaves as it does in theory with all of this as just extra "noise" on top, you still wouldn't be able to make any more money trading the ex-dividend dates than you could simply holding the shares. You would just be taking more risk (because of the share price jumping around) for the same expected gain.

Also in practice, it's impossible to tell whether the "underlying share price" (i.e. the price it would have if all the "noise" were magically removed) really behaves the way that it does in theory. The problem is just that the "noise" is so big compared with the underlying movements (typically, the "noise" is movements of some tens of percentage points, the underlying movements just a few percentage points). So it's conceivable that there are systematic profits (i.e. not just ones that you get right accidentally because the "noise" went the right direction for you) to be made by trading ex-dividend dates, but very difficult to tell whether they really are systematic.

I gathered some data some years back about this - basically comparing the drop in price between market close the day before ex-dividend day and ex-dividend day with the amount of the dividend. It did look as though there was a small tendency for the dividend to be slightly bigger than the drop, meaning you could make money by holding over ex-dividend day. BUT:

* I didn't have anywhere near enough data to be certain the effect was real.

* The size of the effect I saw was less than 0.5% - which means that it will be less than the stamp duty and probably less than the bid/offer spread.

In short, even if the effect is real, it can't be traded profitably because it's smaller than the trading costs.

"Alternatively, if you had the facility, could you not short sell the day before going xd for a predictable profit? I assume you couldn't do that with a spreadbet based on the futures as they already take dividends into account (and SGI in particular isn't spreadbettable to my knowledge)."

As others have said, any method of shorting will end up with you paying the dividend. For "real" shorting, as opposed to doing it with CFDs or spreadbets, this happens because the standard stock lending agreement requires you to pay the dividends on the shares you've borrowed to whoever you've borrowed them from.

More generally, if anyone were idiotic enough to offer a form of shorting that does not involve the shorter paying dividends as the shares go ex-dividend, they would basically be inviting arbitrageurs to:

* Go long on the underlying shares just before they go ex-dividend, sell immediately afterwards and collect the dividend.

* Go short using the new method at the same time as the underlying shares are bought and cover the short position at the same time that the underlying shares are sold, and not pay out the dividend.

The net result would be that the arbitrageurs would collect the dividend minus their trading costs, for no risk taken. Net result: as long as the trading costs aren't excessive, they would basically be giving the arbitageurs a license to make money - and that money would almost certainly be made at their expense.

So don't hold your breath waiting for someone to offer such a form of shorting...

Finally, mad4IT wrote:

"NB: Please don't let my musings influence your investing decision, It's just my opinion. I can also see a slightly more bearish scenario that the MMs might try on the run up to the XD date, but this will probably depend on buy and sell volumes closer to that date. I'll expand on this if I see signs of it occuring."

I would imagine this goes something along the lines of:

1) Run down their positions close to the ex-dividend date, or maybe even take them somewhat short.

2) Mark down the price by a bit more than 10% on ex-dividend day - i.e. a bit more than the 8.5p of dividends would really justify.

3) With luck (from the MMs' point of view) this will cause a lot of people's trailing stop losses to trigger. The resulting selling may take the price lower - possibly low enough to trigger 15% trailing stop-losses, etc.

4) When this starts to run out of steam, build up their positions again, ready for the share price to start rising again.

Remember market-makers mainly make their profits from the spread they make on each share traded. Share price movements tend to reduce the spread they make unless they take a significant short or long position - but they'd much rather make a reduced spread on a lot of shares traded than the full spread on just a few. From their point of view, something like the above might stimulate trading enough to be well worthwhile.

Note that going short in step 1) would involve a bit of a risk for them - the idea would be to benefit from the price fall, but if they get it wrong and the ex-dividend fall causes a lot of people to decide to put in buy ordera, they could end up taking a loss on the short position and having to pay out the dividend... In fact, the whole manoeuvre will be dangerous for them if demand is strong - so only expect to see it if demand for the shares is weakening by that time.

And the main thing to learn from this thought experiment? Don't use a tight stop-loss on this share over the ex-dividend date, unless you actually want to sell and to receive part of the proceeds as income rather than capital gains. In particular, stop-losses in the 5% region are almost certain to trigger, and ones in the 10% region or a bit higher might well be manipulated by the MMs.

Gengulphus

[kael] 02/8/2004 15:51

well...for the first time in ages we see KBC move off the offer

[kael] 02/8/2004 14:17

Here's a thought, if the mm's hold a short position on the ex divi date does that mean they'll have to pay the dividend? In other words - that's the last thing they'll want to be doing?

[kael] 02/8/2004 14:12

... LOL well if we can take those numbers at face value then it doesnt look too bad at all. Somethings gotta give.

[ukhawk] 02/8/2004 14:10

On comdirect, they'll sell you 10k @ 97p, and buy 75k @ 95p...yep 75k !!!

[ukhawk] 02/8/2004 13:57

Kael, well thx for clearing that up, LOL

[kael] 02/8/2004 13:50

Level 2 has been interesting since Friday afternoon.
There are 3mm's on SGI. KBC,WINS,SCAP

KBC was on the offer practically all day (if not all)on Friday. In the afternoon Scap jumped 2p on the bid above everyone else, whereby you had two on 92 - 97 and one on 95 - 100, each with a 5p spread. Then at some point wins went to 93 - 98 and then switched back to 92 - 97.

Now today it opend up 1v2 95 - 97, with scap on the bid. Then wins moved to 93-98 and then we saw that 30K trade go through at 98. They then changed back to 92-97. Now we see scap drop 1p to sit at 94-99 which is 2p above the other mm's.

Hope I havent confused you :(

btw has anyone got deal sizes quotes - may give a better indication (then again it may not ;))

[ukhawk] 02/8/2004 13:44

Kael, what's L2 ? Any clues ? If they had the stock earlier why bid 96p and not push the offer up ? Think they're bluffing !

[fingers xxd] 02/8/2004 12:55

The constant buys throughout the morning has provided an intraday chart that is saying to me, that any buys after 1pm will have to be above 97p .. not long to wait to find out and get 'egg on my face' .. lol

[kael] 02/8/2004 12:53

How long can a trade be delayed for? Anyone got the times for differsnt sized trades? Is there a possibility it is carrying over from Friday?

[ukhawk] 02/8/2004 12:44

There must be a few T+ 10k trades to close out, maybe they're holding it down for them ?

[mad4it] 02/8/2004 11:36

Bad luck mate, I know exactly how you feel....

I'm more gutted than a little gutted thing, leaving on the last train from guttedville! But I should have been quicker with my phone trade when I got locked out online!

C'est la vie, onwards and upwards, eh! ;)

[ukhawk] 02/8/2004 11:21

mad4IT, good to see you've calmed down ! I had a VOG quote on my screen at 8.05 and thought I'd have another look in an hour - big mistake !

[mad4it] 02/8/2004 11:13

Agreed. I'd expect a delayed sell later today.

[kael] 02/8/2004 11:09

I'd agree with you! I would have thought they would have run it up a bit more averaging up as they go, but they must have got some amount of stock from somewhere to keep the offer down like this - its the only plausible explanation.

[ukhawk] 02/8/2004 11:06

Well they must have picked up at least 50k, but still don't understand why they haven't walked the price up. I'd say they were still short.

[kael] 02/8/2004 10:50

What else can explain the lack of a rise ukhawk? mm's go short, of course they do, but they dont happily sit back and take 100K of buys for no reason. Even assuming they were flat over the weekend, there is still an imbalance, a seller is my only explanation. Any buyers in volume would have to pay over the offer as we have seen.

PS. My crystal ball isnt working as well as it should today LOL.

[ukhawk] 02/8/2004 10:45

??? If the mm's have a seller why aren't they pushing the price up ? After the w/e press they could have moved it.

Kael, this is your theory ! LOL

[kael] 02/8/2004 10:29

Nurdin, there has to be some kind of large sell in the background - the numbers just dont add up.

[nurdin] 02/8/2004 10:27

Tick up anytime soon I expect..unless theres a large sell in the background not shown yet.

[kael] 02/8/2004 10:09

Got to be an overhang surely? 30755 buy went through at 98p! Once this mystery seller clears you can bet its going up LOL.
Wins went 1p off the offer for that 30K buy it looks like.

[kael] 02/8/2004 09:22

Pointless bit of info for you now - we've had a few K shy of 100K bought at 97p.

[ukhawk] 02/8/2004 08:58

Morning, strange they didn't push the offer up first thing.

[kael] 02/8/2004 08:37

Current bid is 96p to sell...mid price.