Short Selling Debate

[chops_a_must]

Whilst short-selling does add liquidity to the market and in that regard is a good thing I think that things go a wee bit far when hedge funds can circumvent disclosure rules to target a company and bring it down to the point of collapse.

How does shorting shares bring a company to the point of collapse?

At the end of the day, the share price reflects the value of the underlying company. A company going belly up will collapse the share price, not the other way around.

 

[gilbo]

How does shorting shares bring a company to the point of collapse?

At the end of the day, the share price reflects the value of the underlying company. A company going belly up will collapse the share price, not the other way around.

Not necessarily - a diving share price that breaks any existing banking covenants (for example) can collapse a company.

 

[wayneL]

At least they're blaming someone other than day traders these days, lol.

 

[chops_a_must]

Not necessarily - a diving share price that breaks any existing banking covenants (for example) can collapse a company.

Any company that ties its lending arrangements to its share price is:

1) Incredibly stupid
2) Has no idea about volatility and risk
and 3) Deserves to go under.

 

[ROE]

Anyone want to short WOW and bring it to $2 .. I buy a couple of hundred thousand shares .. Company going down because of bad management and high level of debt and cant get their head above water because of debt commitment.

Got nothing to do with short selling what so ever...don't blame someone else for your greedy and bad judgment.

Ever seen a company go broke because they got no debt??

 

[ROE]

Not necessarily - a diving share price that breaks any existing banking covenants (for example) can collapse a company.

Hello!!! if you bring on debt to an extreme level that is the risk you got to manage like any other business investment. And if you dumb enough not to know that you not fit to be a director of a company.

try short something as small as WWA (88 Millions market Cap) and you get burned cos they got zero debt, what bank covenants are they breaking????
they just making money year in year out, and increasing too no debt involve.
now that what I call good management.

 

[lesm]

At least they're blaming someone other than day traders these days, lol.

or the Company Directors selling off their shares. What did/do they know that the journos failed to report or pick up on in the attack on short selling, with the 'hedge fund' excuse.

'Smoke and mirrors' or just plain and simple example of the media using the 'short selling' and 'hedge fund' angle to sell more newspapers.

It would like an attack on an unsuspecting company, taking into account that the general public doesn't really understand the mechanics of short selling.

 

[gfresh]

Isn't it the banks / financiers placing these covenants in place? not the companies themselves?

Lot of "everybody deserves what they get" in this thread. In that case let's give everybody a gun.. whoever wants to kill somebody else can? Not sure if it's the sort of place I want to live however.

Media is simply on the 'blame game' as they always are, no surprises there.. I think a little bit more transparency would keep some people happy, or a couple of further disclosure rules, not banning shorting altogether (which isn't going to happen anyhow).

 

[Nick Radge]

Remember my comments (as was the article) were made prior to the market learning about "lock it in at a lower price Eddy" selling. The media slapped around hedge funds with zero evidence except hearsay from their desperate broker contacts. Now we know the truth. Those fools should now retract their crappola. Anyone knows that to write the quantity of articles those guys do denigrates their work and their image. Unfortunately they appeal to the greater fool concept.

Qantas is a great example of the benefits of hedge funds/private equity. We just hear of that escapade as a positive (and it was never high enough - even though it was 50% higher than the 4-year average) but cross the street and they're crooks. The only crook is "lock it in at a lower price Eddy" and his cronies.

 

[rederob]

If exchanges allow short selling, and they do, then we should learn to live with it.
If companies are exposing themselves to debt, and they do, then we should learn about it.
Companies don't determine how we trade, we do.
So if we can profit from a company's stupidity, we should.
Short selling isn't limited to equities.
It's presently driving commodity prices sharply higher.
So when covering dries up, so will the bull run (for the immediate term, at least).
I suspect any traders with half a brain can work it out, and continue to.

 

[Nick Radge]

rederob makes very good points. The wheel spins both ways.

That said, the current drive higher in commodities is not from a short squeeze. Its commodity and hedge funds getting long. Most (not all) follow the trends.

 

[Rainmaker2000]

If people want to take the risk of short selling, then good luck to them.......I think the put option and CFD is a much more efficient instrument..but what do I know......I don't do much of this stuff

I certainly don't mind if there are these funds out there knocking down perfectly good company share prices by some type of 'short selling' manipulation.......long term investers welcome low share prices....after all, I've never heard of one company say they have a lower profit because their share price went down......good management does not even refer to the share price....

You need to be concerned when management refers to share price too much....insert Enron and ABS to lessor extent

 

[Carol]

Under existing ASX rules (which have not be revised for 30 years) naked short selling has to be disclosed and only 10% of a companies stock can be short sold. If the percentage goes above 10% then the ASX trading platform would automatically reject the trade. These rules are in place to prevent the predatory practice of driving stocks down just to make a profit. What we are seeing at present is covered short selling - made possible by scrip lending to hedge funds. Because the short selling is covered by borrowed scrip it doesn't have to be disclosed and as such this lack of transparency makes the market open to manipulation. Believe me hedge funds are predatory and believe me they are definitely targeting the ASX at present. I am sure that the alleged collusion to drive stocks down is not only confined to hedge funds. Stocks are priced upon information. Currently information is denied the ordinary investor because of secrecy and non-disclosure and information is distorted by the purposeful creation of overreactive selling. Driving stocks down just to make a profit is not what the market is all about and it is about time that the ASX starting regulating scrip lending so that all short selling is disclosed. Until this is done, the integrity of the ASX market remains compromised and not a place for the retirement savings of Australian citizens.

 

[Trembling Hand]

Until this is done, the integrity of the ASX market remains compromised and not a place for the retirement savings of Australian citizens.

Yeah Centro, Allco, ABC learning etc is not the place for retirement savings because of short sellers.

 

[Carol]

Correct these companies Centro, Allco, ABC would not be a good home for retirement savings because they all have very high levels of debt and their fundamentals were doubtful.

On the other hand, there are some very good companies like Babcock and Brown, QBE etc who represent the finest in corporate governance and good risk management and whose share prices have been savaged. Phil Green of Babcock and Brown was recently reported as saying you can't borrow BNB scrip from anyone because it had all be lent out to hedge funds. He has been a voice in trying to get more disclosure and regulation into the dubious practice of scrip lending.

 

[Timmy]

What we are seeing at present is covered short selling - made possible by scrip lending to hedge funds. Because the short selling is covered by borrowed scrip it doesn't have to be disclosed and as such this lack of transparency makes the market open to manipulation.

Thanks for this info Carol, good stuff to enable us to understand how this market (the ASX) is structured. Do you have any more info on this practise? I have seen it offered through a retail broker but didn't realise it by-passed the reporting requirements.

TremblingHand - you're right about the sort of companies that are going to be 'targets'. Any short-seller is going to short-sell companies that research reveals are vulnerable to a share price sell-off, like over-leveraged & over-exposed ... no point short-selling a solid company with a reasonable share price, the short-covering rally that the buyers will surely initiate is going to kill any profits made on the dodgy companies.

 

[Trembling Hand]

Phil Green of Babcock and Brown was recently reported as saying you can't borrow BNB scrip from anyone because it had all be lent out to hedge funds.

And there is a non biased voice.

If your "very good companies" have been "manipulation" down and all their script is out short you should be laughing. We are then on the verge of a massive short covering rally. especially BNB if "all" their script is short and their is nothing fundamently up with the company or economy or their buy, repackage and flog off strategy with debt. You have been give a HUGE opportunity. Of course that is if you aren't in denial about any fundamental problems and its not the shorts but the investors voting against you.

 

[Carol]

Replying to Timmy - good article on BWTS clarifying rules on short selling.

Limits on Short Selling
There are restrictions on how many shares may be sold short. A short sale of an Approved Security may not be made if the sale would have the effect of causing more than 10% of the issued number of shares to be sold short. There is one other important limitation on executing a short sale. That is the ASX requirement that a short sale not be made at a price lower than the price at which the last sale took place. This is designed to prevent short sellers driving the price down.

Procedures and Requirements for Short Selling

The broker has the responsibility to ensure that the sale is flagged to the market as a short sale with the parameter “S”. It is also shown on the contract note as a short sale.

Note the above rules do not apply to covered short sales (from borrowed scrip). As such the ASX recently admitted that it had no idea as to the extent of covered short sales because there was no requirement to report them. Incredible!!! As such the ASX can't monitor collusion or market manipulation.

I'm not against short selling. I am strongly against the lack of transparency and secrecy that exists on the ASX. Scrip lending is regulated in the UK and US but not here and the hedge funds are using this loophole.

 

[IFocus]

Believe me hedge funds are predatory and believe me they are definitely targeting the ASX at present.

Hi Carol you raise some good points but as I think Nick Radge pointed out and you state Hedge funds are predatory and if one can see a stock over sold they will quite happily crush who ever is short for a profit and they do.

I think people are forming assumptions on what a company's price should be in the market environment that applied last year and thinking that should apply now.

Current market conditions are about risk, rising interest rates, rising inflation, and global financial chaos and more, buyers are simply not prepare to accept the risk of those stocks trending down in these conditions hence bear market.

The media beat up has the general population focused on short selling and not on the real issues.

PS I am no funder-mentalist but hasn't BNB have some serious size loans / gearing

 

[Carol]

Reply to IFocus

Re BNB. No it is not leveraged to debt and it has a totally different business than companies such as Allco, Centro etc. It is apparent that there is confusion about what BNB does.

BNB is a global investment bank involved in real estate, leasing, structured finance and infrastructure investing. It has a positive equity/debt ratio. You will need to check its fundamentals yourself though - don't take my word.