Trading by Milford Asset Management portfolio manager Mark Warminger in Xero shares in June 2014 sparked an inquiry by the NZX's market surveillance team and, ultimately, the current market manipulation case against him underway in the High Court at Auckland.

Fraser Wyeth, manager of NZX's market surveillance team, told the court that he'd had email correspondence with Warminger in April 2014 in which the portfolio fund manager sought a price inquiry into Xero stock after complaining about alleged market manipulation through progressive selling behaviour that was designed to cause the price to decline.

Warminger told the NZX team that it was very easy to manipulate algorithms to force stock prices up or down by placing large lines of stock at best bid or offer and then chasing the algos up or down at volume to move the share price.

His complaint was investigated by the market surveillance team and not taken any further.


However, several months later in June, the stock exchange's market surveillance system alerted the surveillance team to trading that had reversed the downward trend in the price of Xero stock.

Warminger had bought 9535 Xero shares on market at an average price of $26.89 per share via direct market access Milford had through broker Macquarie.

Direct market access is given by brokers to certain institutional clients to let them make real-time trades anonymously without input from the broker, though the broker can trace which client made the trade.

Immediately after the buy trade, Warminger sold 17,000 of Xero shares off-market through another broker, UBS, at $27 per share.

Wyeth said that sparked an investigation by his team into Warminger's trading that year as prior to that time the market surveillance team had not previously seen an institutional investor buy and sell the same security in a matter of minutes through different brokers.

"It was considered very unusual for an institutional client to buy and sell in quick succession through different brokers. This created a strong appearance of coordination by Mr Warminger of placing simultaneous buy and sell orders through different brokers," he said.

"My view, and that of market surveillance team, was that the on-market buying directly impacted the market price and created the market conditions for a high subsequent selling price off-market."

Taken as a whole these acts and circumstances, along with their effects, created a strong impression of "price-rigging", he said.


This example led the market surveillance team to review Warminger's conduct further to see if there was evidence of a pattern of trading, particularly through the direct market access.

The further review found several occasions between May and July 2014 where Warminger repeated the behaviour of buying stock through direct market access and later selling the same stock through off-market trades via another broker.

As a result, the investigators concluded Warminger may have breached securities law and referred the matter in August 2014 to the FMA.

Wyeth is the first witness to give evidence in the trial where Warminger is accused of market manipulation on 10 separate occasions.

Wyeth told the court market manipulation is more difficult to quantify than insider trading but describes a range of conduct which has at its core the purpose of setting or maintaining market prices or creating a false or misleading impression of price, supply or demand in a security in order to achieve the same end.

Earlier today Warminger's lawyer Marc Corlett QC said Professor Michael Aitken, a world leading expert on market manipulation will later give evidence that none of the 10 trades identified by the FMA created a false or misleading appearance in the market.

Corlett said Aitken's evidence would compare with that of the FMA's two experts - John McMahon and Phil Solarz, one an analyst and another a trader - "who think they can divine from the trade data, a handful of emails, and the timing of some telephone calls, a malevolent intention behind Warminger's trading on 10 occasions."

Aitken has a particular interest in the design and implementation of real-time market surveillance systems to identify prohibited trading behaviours such as insider trading and market manipulation and has designed the SMARTS system in use in more than 50 national stock exchanges worldwide, including the NZX.

Corlett argued Warminger traded stock as part of his role looking after $669 million worth of funds under management rather than just buying the stock and holding until he wanted to divest them.

The FMA's lawyer Justin Smith QC said yesterday that Warminger was under a "certain amount of pressure" to improve the under-performance of the fund under his management.

But Corlett said motive for the alleged market manipulation remained a "real bewilderment" to Warminger.

If the FMA case was proved, the 10 trades would have increased the value of the fund by around $50,000 which represents just 0.007 percent increase on the funds under his management, he said.

The theory that Warminger was under performance pressure was never put to him during the FMA's interview process and the FMA has not called a single witness to talk to the document that it is based on, he said.

Originally four Milford witnesses were to be called and now none are, though executive director Brian Gaynor is being called by the defence to give evidence.

"The FMA provided a brief of evidence from Gaynor in which he said he wasn't concerned about Warminger's performance issues as he considered that 'his underlying investments were sound on a medium term basis'.

"Over a six-month period he was just over 1 percent behind the benchmark," Corlett said.

"This FMA interpretation of personal appraisal documents is in there for no other reason than the need for the FMA to come up with something to explain the otherwise inexplicable - why a highly regarded and successful fund manager would put his career in jeopardy by engaging in criminal conduct for no obvious financial gain?"