(Bloomberg) -- Around 10:20 a.m. one morning last month, shares of Continental AG dropped almost 5%. There had been no statement from the company, no important industry news. But most traders knew. It was that time again.

Executives at the tire maker had been speaking to analysts on what is known as a pre-close call. These private chats, held with a select few to help them prepare for upcoming results, are particularly widespread in Germany and elsewhere in Europe. Everyone from Volkswagen AG to chemicals firm Brenntag SE holds them and they’ve been a tradition for years. But some investors are calling for change and Germany’s financial regulator is assessing current practices, according to people familiar with the matter.

Companies say they abide by rules that they shouldn’t disclose anything new on the calls, and there’s been no suggestion of any wrongdoing. Even so, there’s concern from trade bodies and investors that some in the market could be getting advance sight of tradeable news — an information asymmetry.

A spokesman for Continental said only that the company is in regular contact with market participants outside of the “quiet period” — the weeks before the release of quarterly results.

“The current practice is not fair,” said Dominic Traut, a fund manager at Julius Baer. “One needs to figure out for every company which analyst is the first, or among the first” to speak with management. “If you then want to trade or make money on this information you need to make sure that you are among the first investors that receive the respective analyst comment,” he added.

Traders are somewhat more sanguine. While pre-close calls are a “grey area,” and can give some an “unfair advantage,” anyone who is well prepared can look to capitalize, said John Moore, head of trading at Berkeley Capital Wealth Management.

BaFin, as the German regulator is known, plans to survey the majority of the companies that populate that country’s main indexes about their practices, though there is no evidence of any wrongdoing, the people familiar with the matter said.A representative for BaFin declined to comment on the regulator’s actions. Companies “are well advised to scrutinize market practices to ensure that the line between properly informing the market and disseminating inside information is never crossed,” the spokesperson said.  They should “strive for as much transparency as possible to increase confidence in their practices.”

The US eliminated the once-routine practice of companies giving special briefings to brokerage firms almost 25 years ago when the Securities and Exchange Commission introduced Regulation Fair Disclosure, which banned companies from disclosing information to some shareholders and not others.

In Europe, long-running frustration about pre-close calls is bubbling up again in an environment that has market participants on edge amid economic weakness, election uncertainty and Middle East tensions. Thinner trading volumes overall in the region over the past two years are also not helping, ensuring bigger movements when someone does trade a stock.

That means more volatility as investors bet frantically on information passed around by brokers, spread via email, chatroom and phone.

Some companies are taking their own measures. 

Puma SE saw increased volatility last year around the time of pre-close calls, despite not doing anything differently, and decided it needed a rethink. After discussions with investors and analysts, the sportswear maker now publishes what it calls an aide memoire before quiet periods, outlining the public information it’s provided.

“Increased short-term volatility without additional news is not in the interest of long-term objectives,” Puma said.

For companies, the chance to update analysts helps to avoid big misses and surprises. The FIA European Principal Traders Association, which represents market-making firms, agrees there may be legitimate reasons for the calls, such as addressing incorrect comments that would create “erroneous price signals.”“Companies might use those calls to manage consensus,’’ said Evgenia Molotova, a senior investment manager at Pictet Asset Management.  “It would be interesting to see if there are some significant moves in consensus earnings estimates one month before the results - the time when those calls are held."

But Piebe Teeboom, FIA secretary general, says the rules around any such conversations need to be tightened. In addition to disclosure restrictions, companies shouldn’t try to influence the estimates of selected analysts so they can then beat the consensus on earnings day.

“Further obligations need to be set for issuers that clearly prescribes out how to correctly and timely disseminate any sensitive and material information,” he said. 

ESMA, the European Union’s top securities watchdog, said market oversight and analysis of specific episodes of volatility fall under national authorities. It added that it “emphasizes the importance of timely disclosure of inside information” and is in regular contact with local regulators.

The calls start in lead-up to the quiet period. There’s usually a pecking order, where certain analysts get the first slot. Others have to wait, or don’t even make the cut.

The path from the conversation to the share-price reaction isn’t always the same, but there’s a rough route, according to traders.

When an analyst speaks to a company, they usually send out a summary note to clients. But they’ll sometimes share their initial, more casual thoughts over the phone or via email, and from there a view spreads across trading desks, often at such a pace that there can be misinterpretation. Or, more simply, traders hear that something is moving and react to half-heard information for fear of missing out.

Tone and Emphasis

Moritz Kronenberger, a portfolio manager at Union Investment in Frankfurt, has seen numerous examples where shares have been hit by what he called “man-made risk potential.”

For him, it’s not just about what’s said, but also how it’s said. Tone and emphasis are important.

Teeboom at the FIA has similar concerns: “Issuers should also refrain from attempts to influence an analyst via more subtle suggestive signals,” such as a “nod and wink.”

On the trading side, once the calls start, so does the hunt to get the first readout.

“There is sufficient regulation of what can be shared,” Traut said. “However, it comes down to giving everybody access to the same information at the same time.”

Back in January, shares of VW jumped on the morning of one of its calls with analysts. Fabio Hoelscher at MM Warburg & Co., who spoke to the company that day, said the information was nothing new.

“All they did was talk about the S&P global volume outlook for 2024, so it’s nothing that they came up with, it’s nothing that hadn’t been said before,” he said. “It’s just something that some people seem to have been unaware of, some people even misunderstood. And that’s what then drove the stock up.”

VW said the calls are an “established format” to provide “all market participants simultaneously with relevant public information.” It said it doesn’t comment on specific share price movements.

Still, VW is also making changes. It held its most recent pre-close call at 5:45 p.m. Frankfurt time, after the European stock market had closed, analysts told Bloomberg. That gives people time to catch up before the next morning. After-market calls could be beneficial in terms of reducing intraday volatility, said Koen Croese, a trader at Van Lanschot Kempen.

Porsche AG, which was spun off from VW a few years ago, invites investors as well as analysts to one meeting, making the pre-close call more inclusive and reducing any asymmetry. The company said it doesn’t comment on specific share price movements.

A Brenntag spokesperson said the chemicals firm is “committed to maintaining transparent and consistent communication with all market participants” and adheres “strictly to regulatory standards.”

Beyond the controversy, the other issue for many is that the calls add to an exhausting schedule of earnings and pre-releases.

“We talk three times about the earnings of one quarter: the pre-close call, then preliminary results, and then the actual results,” said Kronenberger at Union Investment. “And in each of those calls or type of meetings there is a surprise potential, even though we talk about the same numbers.”

--With assistance from Sagarika Jaisinghani, Michael Msika, Jan-Patrick Barnert and Kit Rees.

(Updates with background on USRegulation Fair Disclosure in ninth paragraph)

©2024 Bloomberg L.P.