Rules of the rollercoaster

It's a roisterous ride for any investor relations officer: your stock zooms up – or zooms down – and everyone is screaming for answers. What information, if any, is out there in the marketplace making investors behave that way on this day?

For some companies it's a warning that material information has leaked – deal discussions, maybe, or a profit warning. Others are increasingly seeing message board or chatroom rumors sway their stock. Often the price movement is unfathomable, and the only option is a boilerplate press release resulting in one of those headlines that crosses the tape several times a day: 'American Gem can't explain stock price rise.'

As Cameron explains, proclaiming ignorance in such a situation is simply good disclosure practice. 'We know that if anything material happens that could affect the price of the stock, then we have to get a report out on it PDQ. It follows that when something you don't know about is affecting the price of your stock, it's material information that you don't know anything.'

All companies, and small caps like American Gem in particular, need to be ready to react to a plunge or a rise. And the need is greater than ever. 'There's no doubt we're seeing more volatility in stock prices, partly born of the way institutions are dealing,' says Robin Key, head of the investor relations department at Warburg Dillon Read in London.

Another cause is the technical structure of markets, right down to the information technology driving them. 'We've seen that in the UK market over the last couple of years since the adoption of Sets,' says Key. 'That has certainly increased volatility.'

Larry Bridge, chief operating officer of the Carson Group, a New York-based stock surveillance firm, prefers the term 'irrationality' to 'volatility'. 'Investor decisions have been less motivated by rational understanding, and more motivated by a quick reaction to keep up with the Joneses. There's an intense pressure on fund managers to match very high returns, so they're less tolerant of short swings and more willing to make rapid movements.'

As IROs like Cameron have found out, the stock exchanges are watching carefully for sudden movements in stock price in case any information has leaked into the marketplace that should be disclosed. The London Stock Exchange, for example, uses 'fuzzy logic and neural networks' to profile the normal trading pattern of each stock. 'Then when a movement occurs that is outside those parameters, it calls up an alert. We get quite a few of those every day, and most are explainable,' a spokesperson says. The LSE also has a built-in circuit breaker to trigger a suspension in trading if a stock moves 20 percent from the open in any one swing.

The Nasdaq Stock Market also monitors trading activity with an automated surveillance system. Sheila Dagucon, vice president of the Nasdaq marketwatch division, says the system takes various pieces of information into account, including historical trading patterns and how the market is currently moving. Her staff is alerted whenever a stock is trading in an unusual manner.

'Our analysts review the situation to see if there's any news that might account for that activity – a press release or an analyst upgrading or downgrading the stock. If there's no such information, then we talk to the marketmakers to find out if they're aware of anything. And if there's still no explanation, our next call is directly to the company to find out if there are any undisclosed corporate developments,' Dagucon explains.

She adds that at the end of March, the NASD board voted to let marketwatch halt trading without having to talk to the issuer in cases where news is imminent – news that even the company may not know about.

Things are a little different at the NYSE, where market surveillance watches out for strange stock moves while the client services department makes contact with the company to decide if a public statement is necessary. Richard Simonelli, Citigate Dewe Rogerson's US head of financial communications, used to work in client services at the NYSE and on occasion made such calls. 'The first question was whether they knew about the unusual trading activity, and you'd be surprised at how many companies didn't. That got better over the years with more professional IR people. The next question was if there was something the exchange should know about it.'

At this point, it could be that the valuation shift can be pinned on some already public information such as a contract signing or analyst upgrade, in which case everyone can relax. If not, the exchange will make sure a statement comes out saying something, even if it's nothing, and even if it has to issue the statement itself. 'It is the company's policy not to comment on market rumors or trading activity,' an exchange press release might read.

On the other hand, there could in fact be significant corporate developments in the works, and that's when counsel has to make the really tough disclosure decisions. 'One word: sunshine. That's what we're aiming to achieve,' says a Big Board insider. 'If there's information out there about your company – say you're negotiating a merger and your stock is shooting up – maybe you and your counsel should get together and talk about a release. If your stock is moving and you have material news, we don't want you to sit on it.'

'Sometimes companies just aren't ready to make a statement,' points out Simonelli. 'But they can either move quickly or else get dragged into making a statement because of what's going on in the marketplace. It's that or the really ultimate risk: shareholder lawsuits for poor disclosure practices. One of the most important things a company has is the trust of the press, investors and analysts; once you lose that it's very difficult to get it back again.'

Maytag is one company that appears to have faced that difficulty and is now fighting for Wall Street's trust. With the stock losing ground during a couple of days of heavy selling in early September, the NYSE asked the company to issue a statement about whether there were any corporate developments to explain the drop. The result was just another in the stream of 'can't explain' headlines, this time prompted by a statement from the Big Board saying Maytag does not comment on unusual market activity or rumors.

Early the next morning Maytag issued a warning that third and fourth quarter earnings would miss analyst estimates by a wide margin, and the stock opened 26 percent down. The New York Times described analysts as 'shocked and angry', with Maytag's new CEO Lloyd Ward denying any selective disclosure and vowing, 'I've got to figure out how to improve the communication process.'

Natural selection

When shares in Interface Systems of Ann Arbor, Michigan rocketed up 21 percent in a matter of hours, after rising 90 percent in a matter of weeks, CEO Robert Nero took it in his stride. 'It's not so much surprise that I register at what's happened with the stock, but more gratification that people are finally seeing what we're doing,' says the frugal executive on his mobile phone from a New York City bus. 'Our stock was very low priced for the last two years – a no-brainer investment.'

Nero, when probed, admits that the company's stock price rise could have been sparked by a marketing agreement with IBM announced a few weeks before, and by the launch of a 'much-improved version' of the company's web site (www.intface.com). And there's one more thing: 'There have been a heck of a lot more comments on internet message boards than ever before. The velocity has picked up, and for a microcap stock, finally starting to be noticed even a little bit can make a big difference.'

The internet has undoubtedly become a major factor in moving stocks. A 13 percent gain on the Nasdaq small-cap market by Pacific Softworks recently prompted a Dow Jones reporter to call Georgette Pagano, head of investor relations at the newly public company. 'Can't explain,' was the verdict yet again. 'I wondered why (the stock was rising),' Pagano says. 'I called our underwriter and traders that we know, but I couldn't find out where the buying was coming from.'

It was days later that Pagano learned Pacific Softworks had been the subject of postings by Tokyo Joe, a manic day-trader from New York who may – Pagano heard – 'pump up a stock then blow out of it as everyone is buying.'

Whether it's Tokyo Joe or Mr Pink who is talking up (or down) your stock, it's nothing new, says James Alexander, co-founder and marketing VP of eWatch. 'You have talking heads on CNBC whose opinions are respected, and people follow their information. Tokyo Joe and Mr Pink are just virtual versions.'

Alexander stresses that it's typically more difficult for chatroom rumors to move the stock price of large-cap companies. Still, the number of companies – even big ones – that are monitoring the internet for rumors is growing dramatically.

'In this day and age, when stocks move heavily because of a lot of retail activity, the job of regulators and ultimately the IRO is made a lot harder,' warns Simonelli. 'Now anyone with a so-called reputable source can say something in a chatroom and move stocks up and down.

Nasdaq is keeping up with the times by monitoring various internet sites and chatrooms. 'We have a dynamic list of these places, and we'll go in and see what's going on. That's a new part of our procedure in the last two or three years because of the incredible growth in the use of the internet. We also counsel our issuers that they need to be aware of what's happening on the internet, and a lot of companies monitor it.'

As for overseas, Key at Warburgs reports that the issue of chat rooms is heating up. He cites one case of US-based gossip about a UK company that was then forced into announcing an acquisition.

Super sleuth

The real cause of unusual trading activity is sometimes never revealed. In other cases, 20/20 hindsight clears up the mystery. 'But it does often require quite a lot of sleuthing to find what is going on,' remarks Key.

In the absence of other theories, Bill Cameron at American Gem made up his own reason for why the stock soared 25 percent on wild trading. For several months the company was switching focus from mining to e-commerce, with a change of management and a spate of acquisitions. There were certainly 'gold rush' days during that period in response to news, including a TSE volume record last spring. 'A lot of people know about us,' says the IRO. After talking to investors in the weeks following that wild Friday, his conclusion is that investors perked up when American Gem's annual report arrived that week. 'People who had us in the back of their minds looked at this pamphlet and said, Oh yeah! As soon as a bit of that starts, people jump on it.'

For internet company Infonautics, any sudden stock move 'hasn't been a mystery to us,' says Robert Wright, IR director. For example, he recalls November 13, 1998 when the stock went from 21/2 up to 101/2 and closed at 71/2. 'A lot of things were happening concurrently – we'd just launched Company Sleuth and there was a lot of buzz and hype around.'

Company Sleuth itself may help IROs identify rumor sources by trawling the net for mention of their company, though it's more likely to be a cause of stock swings than a cure. Designed to 'create a level playing field for information on companies', the free service foresaw the DaimlerChrysler merger when Skadden Arps registered the domain name, and it broke the news to investors about MCI/SkyTel based on a similar clue.

Close to the action

Robin Key says being close to the global equity operations of Warburgs puts his team in a good position to investigate unusual stock moves. 'We can quickly and easily tap into market mood and sector mood, looking for any news that's company or country-specific,' he says. 'That's the checklist we go through, actually talking to marketmakers and traders. In many instances, we are able to piece together the reason why a share price is moving.'

Having a tight communications team helps in this detective work, according to Citigate Dewe Rogerson's Simonelli. 'When you're trying to identify leaks, you first make sure the breach is not one of the spokespeople. It could be the CEO is speaking to a group of analysts, and though he's not saying anything new, he looks shifty. People will pick up on anything.'

Next to impossible to detect, adds Simonelli, is an imminent rating change that an analyst's institutional clients already know about, or a big institution dumping shares at any cost.

Carson's Larry Bridge – a veteran Westinghouse IRO – suggests that a company rocked by an unexplained price movement talks to its stock surveillance analyst or, for an NYSE-listed company, its specialist. 'They look at the brokers moving the blocks that day, and have a feel for who those brokers represent. They see movements in other companies, funds moving in and out of sectors, and have a sense of where the market forces are coming from.'

Of course, there will always be those far-sighted companies that just don't bother with short-term price swings. Avers Wiley Sharp, treasurer of Damark International in Minneapolis, which recently gained 18 percent in a day: 'There are three different kinds of data affecting a company's stock price: economic, industry-specific and company-specific. On average, 80 percent of the change in stock price on any given day is due to the first two. Why spend your whole life worrying about 80 percent of things outside of your control?'