Finanical critics from the Conservative Party and the NDP have called for an inquiry into the possibility that prior knowledge about the Department of Finance announcement of “no change to trust policies” provided insiders the potential to profit in trading during the day prior to the official announcement.

Two days prior to the government policy announcement after the close of trading Wednesday November 23, traders and officials at the TSX characterized the income trust market as “totally dried up”.  Little trade was happening because investors and traders remained uncertain about the potential imposition of new taxes on the sector by the Department of Finance.

But during the day of trading prior to and on the day of the announcement, trading volumes rose significantly prior to the announcement.  And in fact the entire Toronto Stock Exchange rose with the rise in prices of income trusts and dividend-paying stocks.

Specifically, observers note increases in equity prices for large issues and indices:

Yellow Pages Income Fund units increased 3.4% in price ahead of that announcement by Goodale to confirm that there would be no new tax income trusts.

Shares of BCE, the phone company with a dividend-paying share increased in price by 3.3% in the final two hours of trading Nov. 23 just before Finance Minister Goodale announced the new plan to cut dividend taxes.

So too, the S&P/TSX Capped Income Trust Index rose 1.5% on Nov. 23 before climging 4.4% the following day with full disclosure in the news.  For the index, that day provided the largest single-day gain in eight years according to Bloomberg news.

It appears that some traders were able to begin trading with sudden new ability to anticipate the sector would rise with relief from threat of government policy reforms.  Such traders would have benefited greatly with the subsequent rise in sector values that followed the announcement. And such trading could be considered unfair, if not illegal.

Possibilities include:

1) Government officials and their contacts began to invest during the day based on their privileged knowledge of the looming announcement;

2) Pension fund and other senior market participants happened to all start trading on the same day after being contacted a couple of days earlier by government officials who wanted to discuss aspects of the proposed policy prior to its announcement;

3) Significant investments by a relatively few insiders triggered growing speculation and investment by others during the day.

The fact is that trading volumes rose prior to the announcment. As a result, the Conservative Party called a press conference on the weekend to say that it would be writing to the Ontario Securities Commission to request an inquiry.  Conservative MP Jason Kenney characterized trading of trusts prior to the government announcement as “suspicious”.

NDP finance critic Judy Wasylycia-Leis issued a statement to say that her party wanted concerns about insider trading handled through an inquiry by the RCMP. She said, “When huge amounts of money exchange hands just before a government announcement, it looks bad...If there was a leak, we need to know exactly when, why and how it happened.”

As early concerns began to appear just after his announcement, Mr. Goodale denied that advance news was provided to anybody about his stance on trusts.  Many note, however, that in a political and public environment, it is practically impossible for Mr. Goodale to make his decision on policy and then announce it in absolute isolation. People knew what was going on.

Now that questions are being raised, it would be useful to also consider whether any odd trading behaviour occurred after the first Department of Finance announcement that it was initiating a Consulation process, but before its subsequent news about a freeze on new income trust tax rulings.  It was that news that triggered a market sell-off.  So that news, if known before hand, could well have benefited insiders who were given prior knowledge of the rulings freeze.

Since the beginning of September market participants have witnessed the absolute degree to which unstable government policy sets the most fundamental tone for market risk.  And money is made when traders gamble or time investments to address market risk.  Sometimes winning traders are attributed great luck or, sometimes, prescient wisdom.  Sometimes the winners are large enough to influence trade and perceptions of it.  Sometimes the winners manage the timing of news and, in essence, manipulate perceived risk in public markets for private gain.

This is just one clear example of the kind of risks and trade that can happen every day in markets around the world.

It’s necessary to ask, but often futile to consider: Who benefited?  By how much?

It’s just that we may not get many answers on this at all. And if answers are found then it is not very often that charges are laid, let alone that charges will result in a successful guilty conviction.

Yet, perceptions of Canadian market integrity and a trustworthy policy regime would be enhanced with convictions. Our markets would be all the more attractive with some kind of guilty conviction to close off the entire two month policy spectacle. With the government handling of its Consultation process and tax ruling freeze, many now see other markets as being more aggressively policed and better maintained in terms of policy.  Then again, some comment that financial markets outside of Canada work with more conscious appreciation of their tentative value in a highly competitive and global financial world.

Some have suggested that the income trust market experience of the last couple of months generally demonstrates that it’s time for new capital markets policy and standards designed to attract capital to Canada.  Policy reform should look beyond simplistic questions on small tax concerns towards measures to create a low cost new issue process with a more stable and transparent trading environment in which stakeholders can participate with confidence.  Those kinds of standards are being set beyond Canadian borders.

As pleased as the TrustInvestor may be about the short-term “save” from imposition of new trust taxes and as fast as the markets rose in response to the government news last week, some confidence has been wiped from the market.  Total market values remain slightly below mid-September levels.  So on average, investors remain at a slight loss while market traders and players could well have made large gains on both the way down and partial bounce back in trust prices.  Prior knowledge of news turns possibilities into realilty for traders.