Friday, June 20, 2008

Off message but still has implications across many levels of the economy

Short-selling: Nasty, brutish and short

IT IS difficult being a short-seller. Most shareholders and managers agree that you are an important part of an efficient stockmarket—until you dump shares in their company. Then things can turn nasty. How much of the current rise in oil price is speculative? Most I think....but we are all hurting. One thing is certain someone somewhere will be getting very rich.

Posted by rental john @ 10:26 AM (753 views)
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9 thoughts on “Off message but still has implications across many levels of the economy

  • Seems as though the FSA’s war against shorting is just another way of protecting the banks.

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  • Having lost money going short on oil at $100 and made money going short on the ftse at 6400 I can’t see the problem.It is just a very slightly more skilled form of gambling than the lottery

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  • Funny how the campaign against ramping shares and encouraging long positions is never so intense.

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  • Icarus – yes, people have been shorting using one method or another for years. Whether thats real shorts, selling futures , writing calls (either covered or naked) or whatever. The point here i think is they dont want those nasty shorters to sell short while the shares are subject to a rights issue…..And why not?

    I mean if we have a markt we have a market. If the price is too high then there will be more sellers than buyers and the market will be pushed down. All this rumour pushing is just plain twaddle in my view. The shares are shorted because the market views them as too expensive. thats it. The article states

    “However, since the 1970s the best-known official studies in the West have shown that short-selling is broadly a force for good, aiding price discovery and preventing shares from becoming overvalued. That conclusion is supported by academic research. After examining the run-up to the crash of 1929, Owen Lamont of Yale University and DKR Fusion, a hedge fund, found that the more investors wished to short-sell a stock, the more overvalued it proved to be. In another study of American firms since the late 1970s, Mr Owen found that companies that attack short-sellers, with belligerent statements or harsher tactics, are likely to go on to underperform the wider market”

    Now can these banks and the government leave the market alone and stop blaming everyone but themselves for the fix they are in. If the short sellers are wrong they will get spanked (i mean in the financial not literal sense).

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  • techie – according to the article they almost spanked shorters in the literal sense in Malaysia. Down with the shorts as well as the shorters.

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  • yea – i read that – quite amusing icarus. Spanking a naked shorter. Ouch.

    When i worked on the LSE (when they actually had a floor – showing my age) there was a two week account and then a settlement period. Basically you could trade within the account period and not have to settle until after. So you could buy some shares and if you sold them during the period you never physically had the shares , your account was calculated on the difference between the purchase price and the sale price.

    Therefore by the same token you could be a naked shorter i.e. sell the shares you didnt own and as long as you bought back within the settlement period again your account would just be credited / debited with the difference. Now i havent dealt in shares themselves for quite a few years and have no knowledge about current settlement periods (i acttually assume they dont exist). My recollection was that a naked short was always judged more risky than a naked long, and therefore you needed more collateral lodged to deal.

    The reasoning was probably that there is a potential unlimited loss on the shorts, whereas risk on longs is limited to the actual price of the share.

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  • I find that the people who claim that short selling is in some way un-ethical generally don’t really know what it is, and certainly have never done it.

    There are already pleanty of rumes to try to prevent aggressive short selling, this new one won’t change anything except a providing a bit more work for the admin staff.

    The removal of anonymity may cause embarrassment (RBS revealed as shorting HBOS for example) or it may even make things worse – what would the market think if one of the large shorts in B&B for example turned out to be “G Soros”?

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  • techie, I agree that shorting in general is good for the market and for enabling price discovery. However there seems to be a problem, perhaps you can correct me if I am mistaken:
    The investment banks lend shares to hedge funds for shorting. They charge a fee for this. Who owns the shares which are lent out? Do they belong to the banks or do they belong to ordinary investors who don’t know that their shares are being lent out? Is the fee pocketed by the investment banks, even if they lend out our shares?

    A second problem appears to be the naked short selling scandal. The money involved may not be huge compared to the whole market, but there’s more than enough funny trading going on to sink a small company. A big naked short position in a small stock could end up shorting more shares than there are in existence – effectively destroying the company. This is the allegation made by Patrick Byrne of Overstock.com. Check the usual search engines for details, but don’t rely on Wikipedia – one of Wikipedia’s top brass is supposedly involved in the racket. The full story is a conspiracy theory which s2r1 & co might enjoy!

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  • drewster to be honest i really dont know. I would guess that it depends on the type of fund and that would be detailed in the fund document itself. I would assume that the fee would again just form part of the fund value but that might not. My view is that probably the investment bank would be allowed to do this but if they are reckless presumably their E&O would eventually pick up the tab if the borrower of stock defaulted.

    re your second problem – ive just had a quick look at this: http://www.financialsense.com/transcriptions/2007/0331.html and the slideshow : http://www.businessjive.com/.

    All i can say at this stage is you may very well be right and i hadnt thought about it like this – i was really looking at the HBOS issue. In any case ill take a proper look but my thoughts are yes there should be some regulation in the markets (and elsewhere to stop excesses) but in general markets should be left to trade freely. The restrictions are always applicable at the margins – its just knowing where they are thats the problem! I’ve always been against over-deregulation of the banking sector and this smacks of the same. Not sure it works the same here though. (but again im no expert on this area) . Now where are my charts! 🙂

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