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Spoofing, Twitter and 'illegal market manipulation': does Burford have a case against Muddy Waters?

Burford vs Muddy Waters
Burford backer Neil Woodford and Carson Block of Muddy Waters

After a week of trading turmoil that has wiped off more than £1.3bn off its market value, Burford Capital turned the tables on the short-sellers today with a fierce attack of its own.

The under-fire litigation funder fought back against notorious short-seller Muddy Waters by alleging that its shares had been the victim of “illegal market manipulation” created by high-tech trading and Twitter.

The Neil Woodford-backed company detailed in a statement nearing 2,000 words what it believes is evidence of trading practices that drove down its share price to its lowest level in more than two years. 

Burford argued its shares had been the victim of so-called “spoofing” and accused Muddy Waters of coaxing algorithmic trading systems into dumping its stock. Did short-sellers cross the line by taking advantage of new technologies?

Burford shares first started their slide last Tuesday afternoon after Muddy Waters teased traders in a tweet, promising to reveal the company in its cross-hairs the next morning at 8am UK time. 

Shares in Burford were already on the ropes before the release as speculation swirled the City, closing 19pc lower on Tuesday. 

They plunged a further 46pc the next day when Muddy Waters pounced with a devastating report that accused the Neil Woodford-backed company of “egregiously misrepresenting” its returns and being “a perfect storm for an accounting fiasco”.

Burford argued that so-called spoofing exacerbated its share price plunge after the report. Spoofing is when a high number of trading orders are placed at a lower price before they are later cancelled, an illegal form of market manipulation. By repeatedly feigning interest, this high-frequency trading - high-powered computers that can perform thousands of trades per second - can artificially knock the price of an asset lower. The practice is blamed for a huge flash crash on US markets in 2010 pinned on trader Navinder Singh Sarao, also known as the "Hound of Hounslow".

Spoofing is “relatively easy for regulators and a market surveillance team to spot”, says Jordan Hiscott, chief trader at Bux Financial Services.

Burford pointed to a series of large sell orders that were created and then cancelled, particularly in the minutes ahead of Muddy Waters’ release at just before 8.54am on Wednesday morning.

The company said the 578,000 shares that were cancelled in the minutes before the release are its entire regular daily trading volume.

“We do not see why a legitimate market participant without knowledge of the actual tweet's expected release time and content would be placing and cancelling a large number of sell orders in the three minutes before the release of the tweet,” it said. The company added that “in our view it is unreasonable to conclude that the decline in Burford's share price was driven by actual sales of shares”.

Burford’s statement failed to ease nerves among investors yesterday with its shares sinking 11pc during another rollercoaster day of trading.

One market source calls Burford’s statement a “joke”, adding that the “share price wasn’t driven down by spoof orders from what we saw”. 

They say: “Surely Burford would've been more focused on refuting the claims that were made rather than studying the stock trading patterns if they have nothing to worry about. I’ll be keen to see what they do eventually come back with.”

Trading volumes on Wednesday were well above their average at almost 24 million, suggesting there was still plenty of normal trading. Muddy Waters insisted in its latest tweet yesterday afternoon that it does not have the capability to do the high-frequency trading that Burford has highlighted, calling the claims “preposterous”. 

“If BUR [Burford] wants to bring that to court, we will smack BUR and any supposed expert down hard,” it warned.

Burford also argued that Muddy Waters could have triggered algorithmic trading systems - those with pre-programmed trading instructions - by tweeting certain phrases that computers are programmed to scan for, such as “insolvent” and “liquidity risks”.

Computer-based equity trading systems have become dominant in recent decades, explains Prof Richard Payne at Cass Business School.

He says: “It’s quite clear these days that when you talk about trading you are most often talking about computers trading with one another.

“The human element is supplying the algorithm with the order in the first place and then overseeing the operation of the trade. But really many of the precise details about exactly how an order will execute and how it will trade across the day will be governed by an algorithm.”

Hiscott says market manipulation “has become even more pertinent as we go more into the digital age, where the truly astonishing reach of social media platforms becomes apparent”.

“Not only is the global reach a huge factor but also the immediate effect of a statement,” he explains. 

Programmes scan social media platforms looking for phrases that “could trigger positive or negative sentiment in a financial asset” before telling another system to execute a trade, Hiscott adds.

Tesla has also faced pressure from a community of short-sellers on Twitter with boss Elon Musk confronting one self-proclaimed speculator on the platform. The electric car manufacturer even took out a restraining order against a short-seller that has tweeted “extensively about his desire to see Tesla (and its Autopilot technology) fail”.

Not only can the use of Twitter knock a company’s share price, the power of social media can move entire markets.

US markets suffered a sudden drop in April 2013 after the Associated Press tweeted from its main account that then-president Barack Obama had been injured in an explosion. The fake tweet was later blamed on a hack but the S&P 500 had already tumbled 0.9pc, wiping tens of billions off the value of stocks before the losses were recovered.

The worry for regulators and investors will be that Burford's plunge allegedly at the hands of high-tech trading and the use of Twitter is just a hint of the damage that can be done.