EVERY Friday morning the business team here gathers to discuss possible news stories. We call it the “wish list”. As well as genuine nuggets, it contains wild tales and unsubstantiated allegations that we have picked up during the week.

By the end of the evening we have weeded through it, chucking out those things that cannot be bottomed out. The wish list starts to resemble what will eventually appear in the paper.

What does not appear on that list is as interesting as what goes on it. Every week there are at least 10 stories about rumoured mergers, corporate collapses, takeovers and companies that are in trouble with their banks. Each one is highly price sensitive and none ends up being true, but nearly always the rumours have led to greater activity in a company’s share price - either upward or downward - and someone has profited by spreading those rumours.

What we saw last week, when shares in HBOS, one of Britain’s biggest high-street banks, fell by 20% at their peak, was an extreme example of the kind of rumours that populate City dealing rooms.

There was one significant difference, however. We are interested in the rumours because they might make good stories, not because we might make millions of pounds on the back of them. The HBOS affair was a deliberate attempt to destabilise a share price and to profit from the fall by “shorting” the stock.

Stock markets are driven by gossip – it’s what makes a market work. But it is at times of mass hysteria, at the peak of a bull cycle or in the grip of financial turmoil such as we are experiencing now, that they gain traction. Don’t forget the bubble at the turn of the millennium when a dotcom stock could go up by 30% on a rumour. Or last summer, when the City was gripped by takeover hype and stocks regularly went up by 15%-20%.

Last week, however, the rumours took us into dangerous territory. They threatened one of our biggest financial institutions and, by extension, the stability of the entire banking system.

It is highly unlikely that anyone will be found guilty, although I have little doubt that a number of traders will be quizzed hard by the Financial Services Authority.

There is a professional circle of individuals who operate as a loose federation to put about and circulate rumours. The growing use of the internet and e-mails has made it very easy to achieve this and it is becoming very dangerous. There is little doubt that the proliferation of hedge funds, run by individuals who are highly incentivised to make money from stellar performance, are involved in some of this dubious activity. It is only a very small minority, but it is sufficient to tarnish the reputation of the sector.

HBOS was a scandal, but what happened at Lehman Brothers, the American investment bank, earlier last week was even worse. Its shares collapsed by 49% on the back of a rumour. It is essential that regulators now unpick the transactions at both banks to see who profited.

It is not far fetched to say casinos now appear to be better regulated than stock markets. Those who have been into a gaming establishment will know a series of cameras, linked to a command centre in the basement, will monitor every table and every move a player makes. Anything suspicious is reported. It’s not an infallible system, but it appears to work and, as a result, there are few scandals surrounding the gaming market.

The events of last week highlight just how exposed stock markets are to a planned assault by a small group of people. It also exposes how weak the monitoring system is of our leading regulators to identify when market abuse is taking place. It is no wonder that one of the biggest growth industries in the City is in the area of communications; corporates hiring individuals to screen rumours and dismiss them as rubbish.

To stop them would be impossible. The issue is to stop reacting so quickly to something that is so patently untrue. That, too, could prove impossible. As the world’s trading platforms are becoming increasingly interconnected, they are going to be even more open to abuse. And that should be a big concern.

Stopping the rot

THE three-strong management team that has been parachuted in at Rentokil Initial, the £1.5 billion support-services company, has shown how to play a strong hand against a weak opponent. So desperate was Rentokil to sign up John McAdam, the former ICI chief executive, as chairman, and two other ICI executives, that it has agreed a reward package worth £95m if the share price triples to 280p in the next five years. It is a ridiculous payout for a company that simply requires top-notch operational controls rather than raw entrepreneurial talent. The package was agreed when Rentokil’s share price was at a five-year low. It jumped 20% to 85½p on the announcement of their appointment, and even if the management trio only manage to hit half the target, they will still be laughing all the way to the bank.

Wise words

SIR JOHN SUNDERLAND, outgoing chairman of Cadbury Schweppes, says in the annual report: “The growth of antibusiness feeling, the folly of seeing business as somehow standing apart from society rather than being the engine that allows its needs to be met, has been an unhappy regression in British society.” I agree.

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