Shares in third-party funder Burford Capital fell sharply again yesterday despite its claim that trading patterns behind last week’s share price collapse were “consistent with illegal market manipulation”.
The shares dropped 11% to 755p, compared to 1381p last Monday ahead of the short selling attack by Muddy Waters Research.
However, the price is still above the 605p the shares fell to last Wednesday after the US analyst published its report. It bounced back to some extent after a robust response, but Burford was criticised by another short seller over the weekend.
In a statement to the stock exchange yesterday, the AIM-listed company said: “While Burford continues to analyse the data, it has made regulatory authorities and criminal prosecutors aware of these preliminary conclusions and Burford is considering its own options.”
It said it has retained magic circle firm Freshfields Bruckhaus Deringer and US practices Quinn Emanuel Urquhart & Sullivan and Morrison & Foerster as part of this work.
Burford commissioned Professor Joshua Mitts of Columbia University, who specialises in analysing market data surrounding short attacks, to look at last week’s detailed trading data. It said this revealed evidence of both spoofing and layering.
Spoofing is the placement of a high volume of trading orders at a price equal to or better (i.e. lower) than the ‘best bid, best offer’ price and subsequently cancelling these orders to move the price in a given direction without actually concluding any trades.
Burford explained: “For example, consider a stock where the current best offer is £9.99 per share. A spoofer might place a high volume of sell orders at £9.98, causing the best offer to decline to £9.98, immediately cancel those sell orders before they can execute, and then place a high volume of new sell orders at £9.97.
“The strategy of repeatedly placing and cancelling sell orders at or below the best offer without actually selling any shares artificially drives down the share price.”
It said layering was similar, except that instead of placing and cancelling a high volume of orders at the best offer price, the manipulator placed these orders deeper in the order book, at prices above the best offer.
“Suppose the manipulator worries that the artificially ‘spoofed’ sell orders at £9.98 will be inadvertently executed before they can be cancelled. Instead of placing these orders at £9.98 (or £9.99, the original best offer), the manipulator may place a high volume of orders at £10.01, £10.05, or some other price slightly above £9.99.
“These orders are virtually certain not to be filled but they affect pricing by suggesting falsely that there is a large volume of shares for sale.
“Spoofing and layering are both illegal and have resulted in criminal convictions in the past.”
Burford said there was “an unusual flood of sell-side cancellations” – approaching Burford’s entire regular daily trading volume – in the three minutes before Muddy Waters’ tweet last Wednesday about the company.
“It is also worth noting that, according to FCA data, Muddy Waters initiated its short position in Burford on 5 August, the day before its teaser tweet about a report being forthcoming, reduced its short position by 20% on 6 August, the day of the teaser tweet, and exited a further 63% of the position on 7 August, the day of the report’s release.
“In other words, while Muddy Waters was suggesting that Burford was insolvent, it was at the same time buying Burford shares.”
It added that posting certain phrases, such as “insolvent”, on Twitter could induce an “algorithmic sell off” in a stock.
Chief executive Chris Bogart said: “Burford’s market-leading business today is the same as Burford was a week ago. What has changed is that a substantial amount of market value was wiped out by activity we believe is consistent with illegal market manipulation that has nothing to do with Burford’s business. That is wrong and that is illegal.”