Futures traders possibly wreaking havoc?

MONEYWEB, BY BRUCE WHITFIELD, 21 SEPTEMBER 2001

BROADCAST TRANSCRIPT: Arthur Buchner: Head of Derivatives, BOE. It’s very good on a Friday evening to have a derivatives trader in the studio with us, Arthur Buchner – he’s the head of derivatives at BOE. Arthur, there must have been a lot of derivative action on the JSE today. The futures traders possibly wreaking havoc?

ARTHUR BUCHNER: Well, it was all derivatives trade today. I think most of the institutions have actually taken leave and decided to go away over this period. What we found is that derivatives traders were yet again selling the market, or rather the arbitrage traders were selling the markets, due to the fact that curve traders were coming in to sell in order to protect the underlying [indistinct] on their curves.

MONEYWEB: OK, let’s just go over this in detail so that we all understand it. Because you’re saying that derivative traders were selling the market. Just explain exactly how this process works.

ARTHUR BUCHNER: What happens in a market like the one at the moment … no one is really prepared to purchase in terms of futures itself. So someone has to come in to facilitate, and that person is an arbitrager and an arbitrager buys futures below fair value when the markets are trading at a discount. And this happened today. The arbitragers came in, they bid the futures, they were given the futures by curve traders. They in turn went and sold the spot market down which resulted in our sell-off early on in the morning, and later on, even when the FTSE market actually closed and everyone left, there was fear out of London they couldn’t trade on their stock, so they phoned the South African brokers, sold futures into South Africa and that exacerbated the fall earlier on in the morning.

MONEYWEB: OK, but it’s interesting to see on a day like today where everything was down except the gold shares. Gold shares this week … despite a strong gold price, haven’t responded to that and today they did. The gold index was up more than 4%. We saw DRD, Afrikander Leases even, Harmony, Gold Fields, all of those up. Nicely across the board. But why today did they respond to the gold price?

ARTHUR BUCHNER: Yesterday they were sold down on the futures close-out because Gold Fields and AngloGold, in particular, are part of the ALSI basket and, having been oversold yesterday, people decided to come in today and purchase them. And also with the doubling up of the Dow on the downside as well as the negativity of the futures this morning, they said, well, we’ve got to get protection and protection is in gold. And the arbitragers today, even though they were selling, made no dent in those gold stocks. Those gold stocks were very, very well bid.

MONEYWEB: If you looked at this market on Monday and you look at it today, are you significantly older?

ARTHUR BUCHNER: Yes, a lot. Because the volatility and the illiquidity is what makes us older. When there is a double, there is always a possibility to get in and out, but at the moment in the South African markets, for most of the day we traded on 30-point doubles, and on some of the stocks there were 3000 or 4000 shares bid, 3000 or 4000 offered. If you wanted to buy, you couldn’t buy and if you wanted to sell, you couldn’t sell. And it just exacerbates the moves and those moves – they really kill you.

MONEYWEB: I did a snap survey of 10 institutions around the country today, speaking to fund managers at some of our biggest institutions, and all of them bar RMB said, yes, they’re buying, but very selectively – all of them claimed not to be selling . Have you seen much selling in this market? Are people picking up shares cheaply?

ARTHUR BUCHNER: I don’t think we’ve seen institutional selling at all. And I’ll vouch for them. I think derivatives traders have been the sellers. There have been one or two offshore traders that have been selling the market. But they’ve got to hedge positions offshore which they do in the emerging market, and the emerging market seem to fall easier than what their markets do, and so that’s what they do. Old Mutual, for example, from what I can understand, couldn’t even trade the last three days because their systems have been giving them problems. They definitely haven’t been selling, and we have seen guys actually coming in and purchasing. Not aggressively, but from the derivatives traders at the lower levels.

MONEYWEB: Interesting to see that at last a bit of support for Richemont. That was up 4% today closed at R150. It was all the way down at R142 at one point today. People finally see value in it?

ARTHUR BUCHNER: The purchasing came out of Switzerland, and if you look at the technicals on Richemont, there was a break down to R140. The support is at R140. It goes back to, I think, 1998, which was the low of Richemont in 1998. There’s huge support across the board and the Swiss traders saw that and decided to come in and purchase, and our jobbers, let’s put it that way, came in and sold it, got caught short, needed to cover towards the end of the day.

MONEYWEB: Sasol down 6.5% to R70.50. It’s a 12-month low for that one.

ARTHUR BUCHNER: Today there was a hell of a lot of money to be made by private individuals. Sasol, one of them … it rallied about 4% from its low and then fell back to its low. And Sappi was another one – rallied 6% intraday. Now for traders who say they can’t make 10% in the market over a long term … if you’re willing to pick it up and catch these bounces, there’s 5%, 6% in these stocks. Sasol … on their earnings on their forward projections, it’s a fantastic stock. It’s just been sold by arbitragers who really don’t care where they sell so long as it’s within the index.

MONEYWEB: Are there a lot of day traders in the market at the moment , or do you think they’re also hanging back very nervously trying to figure out where things are going?

ARTHUR BUCHNER: I would think that 70% of the market is day traders at the moment. Without a doubt.

MONEYWEB: Is that an unusually high percentage – it would be?

ARTHUR BUCHNER: It is quite high. I would say, in our market, out market has been taken over by the day traders, and I would say they normally account for about 40% to 50%. But today it was a lot more.

MONEYWEB: Just having a quick look at financials … there are three new lows there. Old Mutual down to a new low, BOE down to a new low and Saambou also down to a new low. Interesting move there, though. We see that Fedsure was down 14% to R4.35.

ARTHUR BUCHNER: That may be on the announcement of them getting Investec shares in the Fedsure … the Old Mutuals was all derivative selling against one of the major indices players. And BOE also in the all share, which exacerbates the fall. On the PEs that these stocks are sitting at the moment, if you purchased them and you wait six months, or within the next six months, you’re going to make 10 to 20%.

MONEYWEB: But there’s no guarantee that this market is not going to go any lower, that’s the trouble, isn’t it?

ARTHUR BUCHNER: There is no guarantee, but if you take us back to 1997 with emerging markets crisis. The bottom of the market was 4700 on the industrial, and at the moment the bottom of the market is 5400. If you equate inflation of 30% over the last three years, then we’re actually 20% lower than the emerging markets crisis of 1997. So you tell me there’s value there.

MONEYWEB: Absolutely. Again the fund managers saying today, yes, there is value, yes they are buying selectively, but they are very cautious about where it’s going to next. Amongst the resources stocks, Anglo and Billiton were down a bit, but again is that all derivative action as well?

ARTHUR BUCHNER: It was derivative action, but when I left the office in America itself Anglos were trading at R94, which was actually up from yesterday’s close.

MONEYWEB: Arthur Buchner, he’s a derivatives trader. Head of derivatives at BOE Asset Management.

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