Short Selling Debate

[skyQuake]

Big hedge fund decides company xyz is over geared with debt to current asset values;

Well then company xyz is overgeared in the first place. Good short.
The fund would obviously do a fair bit of research into company xyz, and they know that if they put too much capital into the short operation, they could get busted easily. A big squeeze by players who know of their short could really screw them over.

The first short drives the stock down causing the margin loan holders to cover their shortfal or sell into the falling share price driving the market down further;

They decide to push it further and attack again;
More margin calls, with the margin lenders having to sell into the falling market beacause their clients have run out of capital to prop up their portfolio's or the client calls time to sell as the share has fallen so far and could fall further;

Margin calls will only flush out so much. I doubt that a significant portion of the company's market cap is held by players who bought them on margin.

And guess what, it was an arm of the bank that lent the shares out in the first place to the hedge funds so that the hedge fund could short the market. Cunning beggars, they get their fees no matter what.

Probably not, conflict of interest. Chinese walls would be an insufficient excuse when push comes to shove.

 

[beamstas]

How do you know?

Scenario:

Big hedge fund decides company xyz is over geared with debt to current asset values;
Big hedge fund scouts arround and borrows a substantlal amount of stock from the superanuation funds and Banks for an upfront fee and flexibilty on when it has to return the stock, covered by ongoing monthly fees;
Big hedge fund commences a progressive attack shorting the stock;
The first short drives the stock down causing the margin loan holders to cover their shortfal or sell into the falling share price driving the market down further;
The big hedge funds can either close out their shorts, at the margin called reduced price or see if they can push it further;
They decide to push it further and attack again;
More margin calls, with the margin lenders having to sell into the falling market beacause their clients have run out of capital to prop up their portfolio's or the client calls time to sell as the share has fallen so far and could fall further;
the hedge fund can close out the short or wait and see what happens next;
oops, the banks are now concerned, as the share price has fallen below their comfort levels for their loans to company xyz. They want greater security and higher interest rates or their money back;
oops, xyz can't refinance with any other banks, lines of credit etc and calls in an administrator; and
the banks say "no you don't, we will put a Receiver & Manager in to look after our interests. And guess what, it was an arm of the bank that lent the shares out in the first place to the hedge funds so that the hedge fund could short the market. Cunning beggars, they get their fees no matter what.

I don't think you know what you are talking about

 

[brianwh]

Perhaps my somewhat superficial understanding of of the arcane workings of the market has lead me to ask a question that reflected this lack of insight. It was my understanding that funds with large hodings in a particular equity would make them available for loan to large hedge fund type companies who would use them to drive the market price down. This downward sentiment in the stock would unsettle other investors leading to further selling. I get the arguments as to why short selling may be positive for the market but simply wondered about this one aspect - why let someone borrow from you to force the price of what you have lent them, down?

 

[Trembling Hand]

- why let someone borrow from you to force the price of what you have lent them, down?

Brian excluding the naked short selling games which is now banned tell us which companies have LARGE positions short?

http://www.asx.com.au/data/Shortsell.txt

This scenario is only happening in yours and nullas head not in the real world.

Any hedge fund trying this game would be eaten alive by the 1000s of other long funds.

 

[cutz]

I think you're going roung in circles Brian a few guys have already explained things. If it's ABC that you are referring to, a large fund would not have had a big enough interest to do such damage by lending out stock, the damage was done by a CEO that had controlling interest via a huge margin loan, we all know what happened next.

 

[gav]

why let someone borrow from you to force the price of what you have lent them, down?

How does it force the price down? They are merely selling in anticipation of buying back cheaper. It does not necessarily mean they will be able to buy back cheaper. It's actually not that different from somebody who owns shares in the same company you do, then sells them hoping to buy them back cheaper later. So why aren't you complaining about those people too?

Or it would be like me saying "How dare you buy shares in XYZ company when I am shorting them!"

 

[brianwh]

I'm convinced. Probably wouldn't have asked the question if I'd had greater insight into the market.

Thanks for your replies

 

[Timmy]

Article in Today's Australian:

Canberra tightens rein on short selling

From the article, these are basically the new proposals:

Under draft regulations released yesterday by Chris Bowen, the recently appointed Minister for Financial Services, Superannuation and Corporate Law, the government wants two streams of short-selling disclosure: "transactional" and "positional".

Transactional disclosure will require covered short selling to be reported to market operators for public release the following day.

For positional reporting, short sellers will need to report their positions to ASIC, which in turn will publicly release the data four days after the positions are taken, beginning on April 1 next year.

I can't see how this is much of a change from the current short sold list? Have a look at what is apparently the problem with the current system (again, from the article):

The current widely derided short-selling reporting system in Australia is based on what is called transactional reporting, whereby ASIC and ASX produce a daily list of which shares have been short sold, and it is published the following day.

Many investors say those numbers are extremely hard to interpret or rely on because they may include short sales that have already been closed out. (my underlining)

I don't get it, currently short positions are reported daily, so with these proposals, by making them report 4 days later (in 'positional' circumstances) it gets around the objection that the positions may already have been closed out? Isn't 4 days later a lot more time to close a position than the current arrangements? What am I missing?

 

[Aussiejeff]

Here they go again....

More jittery BULL$hite... keep blowing those balloons, boyz....

Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.

http://www.bloomberg.com/apps/news?pid=20603037&sid=aMWQn8mCXZxM

Mmmm. Shares aren't supposed to plunge, are they. It just ain't natural! :angry:

 

[satanoperca]

Govnuts should leave capital markets to themselves and stop interfering and get on with the job of governing. Building better infra structure, education systems, getting rid of the queen, providing decent health care and the like.

They should keep their dirty hands out of the RE industry and stop propping up the banks.

Short selling short not be band, it is all just part of the process.

If I can borrow money from the bank to buy a IP for speculation of CG, I should be able to borrow shares to short sell.

Cheers

 

[Aussiejeff]

Here they go again....

More jittery BULL$hite... keep blowing those balloons, boyz....



http://www.bloomberg.com/apps/news?pid=20603037&sid=aMWQn8mCXZxM

Mmmm. Shares aren't supposed to plunge, are they. It just ain't natural! :angry:

Ha!

The cowardly Yanks went and done it. Anything to save their precious Wall St wallies. Desperate to "pump up" some bubbles somewhere... anywhere!

Federal regulators on Wednesday imposed new curbs on the practice of short-selling, hoping to prevent spiralling sales sprees in a stock that can stoke market turmoil.

The Securities and Exchange Commission, divided along party lines, voted 3-2 at a public meeting to adopt new rules.

The rules put in a so-called circuit breaker for stock prices, restricting for the rest of a trading session and the next one any short-selling of a stock that has dropped 10 per cent or more.

http://www.thebull.com.au/articles_detail.php?id=9696

Pathetic.

 

[joeyr46]

Ha!

The cowardly Yanks went and done it. Anything to save their precious Wall St wallies. Desperate to "pump up" some bubbles somewhere... anywhere!

http://www.thebull.com.au/articles_detail.php?id=9696

Pathetic.

always thought you had to sell on an uptick anyway all there going to achieve is no liquidity and complete collapse IMO but the timing is interesting

 

[Aussiejeff]

always thought you had to sell on an uptick anyway all there going to achieve is no liquidity and complete collapse IMO but the timing is interesting

Maybe this will also encourage big US institutional & private equity "shorters" to become more active in as yet like-for-like unregulated overseas share markets. Like OZ perhaps?

 

[Happy]

For some reason I suspect that regulators are getting ready for another massive drop in US share prices.

After all everybody suspects that US economy has to collapse, in the end it might and if it happens in 2012 nobody will complain.

 

[Trembling Hand]

Maybe this will also encourage big US institutional & private equity "shorters" to become more active in as yet like-for-like unregulated overseas share markets. Like OZ perhaps?

Ha! bit too late for the might bit.