Short Selling Debate

[cuttlefish]

cheers for the responses fellas (TH and nomore4s). I'm on my way out for so haven't got time to reply in full but looking forward to discussing it further - there's some things I'd like to clarify on both sides of the argument. TH I didn't realise about the 110% lodgement - is this for naked shorts or shorts covered by stock lending? I'm specifically talking about stock lending here and not naked shorts. (And not CFD's either, wouldn't got near CFD's with a bargepole myself I think there's counterparty risk all over the place there). If the cash from the sale of the borrowed securities is held in trust directly linked to the short position then that does nullify my example.


Just to be clear I'm talking about direct shorting of fully paid shares (not via CFD's) using stock loaned via an Australian Master Securities Lending Agreement (whatever that is - sounds official - hadn't heard of it before the Opes debarcle). I'm not talking about the naked short selling that the ASX allows either.

 

[Pronto]

The key to this fiasco seems to be in the use of the Australian Master Securities Lending Agreement (AMSLA). This is the Aust equivalent of the UK OSLA.
The local version was provided by the legal firm Mallesons in 1997, commissioned by the Aust Securities Lending Association (ASLA). There have been several revisions subsequently, but other than what seems to be an agreement between 'the chaps', there is no mention of any official status, authority, permissions or sanctioning .
The Opes website states that using the AMSLA is not short selling within the meaning of the Corporations Act or ASX Market Rules, but doesn't enlarge on that.
Looks like 'the authorities' - whoever they are - have been caught napping (again).
I would have thought also that this had significant taxation implications to it and that the ATO might have been on to it before now.

 

[wayneL]

Here's another angle:

If we ignore the borrowing stock angle for the moment; because it is only stocks that have this isuue, futures, options etc don't have to be borrowed; But much of ordinary every day commerce utilizes what is technically "short selling" all the time.

Let's suppose I'm a high street retail shop that sells widgets.

A customer walks into my shop and asks for the price on the X765-BHU Super Widget. I say $150.00, but I don't have one in stock so I'll have to order it. Customer say fine, an invoice drawn up, a deposit taken, a sale agreed at a fixed price.

I ring up the widget supplier and buy it at the wholesale price $100, delivery next week.

If we agree that short selling is the actof selling first, and buying at a later point in time, what has just happened is a short sale.

Cheers

 

[Birdster]

Here's another angle:

If we ignore the borrowing stock angle for the moment; because it is only stocks that have this isuue, futures, options etc don't have to be borrowed; But much of ordinary every day commerce utilizes what is technically "short selling" all the time.

Let's suppose I'm a high street retail shop that sells widgets.

A customer walks into my shop and asks for the price on the X765-BHU Super Widget. I say $150.00, but I don't have one in stock so I'll have to order it. Customer say fine, an invoice drawn up, a deposit taken, a sale agreed at a fixed price.

I ring up the widget supplier and buy it at the wholesale price $100, delivery next week.

If we agree that short selling is the actof selling first, and buying at a later point in time, what has just happened is a short sale.

Cheers

But that analogy is just simple commerce, isn't it? Regardless if the store owner has it in stock or not, the price is $150. His price to cover wages, rent, etc... and the rest a profit.

To this analogy it would be considered stealing to "borrow" the widget to sell. If I understand what you mean.

BTW, where can I get one of these X765-BHU Super Widgets. They sound great.

 

[wayneL]

But that analogy is just simple commerce, isn't it? Regardless if the store owner has it in stock or not, the price is $150. His price to cover wages, rent, etc... and the rest a profit.

To this analogy it would be considered stealing to "borrow" the widget to sell. If I understand what you mean.

BTW, where can I get one of these X765-BHU Super Widgets. They sound great.

I have some in stock, but the new price is $160.00 (inflation you see) :

Yes thats my point, short selling is just a part of normal commerce.

On the borrowing point. I just remembered we used to do it from time to time in manufacturing.

We'd get and order, but can't get the raw material in the time frame required, so we'd borrow some raw material from another manufacturer, to complete the order, and replace it when we recieved supply. But by then we'd made the item and shipped it off.

Short selling happens all the time, it's just a part of business.

 

[Trembling Hand]

To this analogy it would be considered stealing to "borrow" the widget to sell. If I understand what you mean.

No. If you walked down the road and smashed a shop window to get your widget thats stealing. If you get it from a wholesaler thats commerce.

 

[Birdster]

...
Yes thats my point, short selling is just a part of normal commerce.

On the borrowing point. I just remembered we used to do it from time to time in manufacturing.

We'd get and order, but can't get the raw material in the time frame required, so we'd borrow some raw material from another manufacturer, to complete the order, and replace it when we recieved supply. But by then we'd made the item and shipped it off.

Short selling happens all the time, it's just a part of business.

Really? A company is willing to lend a direct rival material to help that company make a further profit? And what of the other costs such as transporting the materials to and fro? And if the material became unattainable or was flooded to the market? What if it was Shell supplying BP to make a sale? I can see that is not what I would want a company to be doing if I was investing in them.

Or am I looking to deep into what your'e trying to say?

 

[Trembling Hand]

Really? A company is willing to lend a direct rival material to help that company make a further profit? And what of the other costs such as transporting the materials to and fro? And if the material became unattainable or was flooded to the market? What if it was Shell supplying BP to make a sale? I can see that is not what I would want a company to be doing if I was investing in them.

Or am I looking to deep into what your'e trying to say?

Wholesalers supply other wholesalers all the time. Any one actually been in business?????????????????????????????????????????????????????????????

 

[RichKid]

Wholesalers supply other wholesalers all the time. Any one actually been in business?????????????????????????????????????????????????????????????

yep, doesn't just happen at wholesale level, either, just good business to help out someone, you never know when you might need a hand yourself....the big oil co's and commodities houses do this too between themselves- of course they sometime add extra profit margins in emergencies but it's better than nothing. Just think of the local pharmacy- if they don't have a drug you want they sometimes call a rival nearby and have it brought over or direct you there. The second pharmacy may not transfer the item to the first pharmacy at cost but it'll probably give it a discount. Anyway, just fleshing out the reality of business here.

 

[Birdster]

Wholesalers supply other wholesalers all the time. Any one actually been in business?????????????????????????????????????????????????????????????

Quite stressfull with the Q marks TH.

Supplying a rival business in wholesale is different than "lending" material. I supply my equipment to companies when they are short. But, it is at a premium, and I don't want it back! No lending, no favours, just pure business. By the time "they" sell it, I hope the profit is minimal, if any, to them.

Next time the customer might go somewhere else waiting for the product from a company that has do the ring around?

How do you do business is your business. Just like anyone else doing thier business.

I'm only debating as the thread suggests OK?

 

[wayneL]

Quite stressfull with the Q marks TH.

Supplying a rival business in wholesale is different than "lending" material. I supply my equipment to companies when they are short. But, it is at a premium, and I don't want it back! No lending, no favours, just pure business. By the time "they" sell it, I hope the profit is minimal, if any, to them.

Next time the customer might go somewhere else waiting for the product from a company that has do the ring around?

How do you do business is your business. Just like anyone else doing thier business.

I'm only debating as the thread suggests OK?

My industry was multifaceted. My competitor was not necessarily a "direct competitor". In other words, our customers came from a different demographic. There were of course many businesses with an attitude like yours. No biggy, no favours were asked of them, but no favours were extended either.

There is enough for everybody, business doesn't have to be war.

 

[nomore4s]

Really? A company is willing to lend a direct rival material to help that company make a further profit? And what of the other costs such as transporting the materials to and fro? And if the material became unattainable or was flooded to the market? What if it was Shell supplying BP to make a sale? I can see that is not what I would want a company to be doing if I was investing in them.

Or am I looking to deep into what your'e trying to say?

My industry was multifaceted. My competitor was not necessarily a "direct competitor". In other words, our customers came from a different demographic. There were of course many businesses with an attitude like yours. No biggy, no favours were asked of them, but no favours were extended either.

There is enough for everybody, business doesn't have to be war.

Run a showerscreen & robe business, and am always lending/borrowing stock from the main opposition, no big deal imo, they help us out, we help them out, plenty of work around for everyone

 

[Birdster]

My industry was multifaceted. My competitor was not necessarily a "direct competitor". In other words, our customers came from a different demographic. There were of course many businesses with an attitude like yours. No biggy, no favours were asked of them, but no favours were extended either.

There is enough for everybody, business doesn't have to be war.

So off topic now, are we not?

Cut throat "war" mongering business I'm in then. Maybe why I didn't see your context of the anology you posted before. My business is non "demographic" dependant. So I must do what I do.

I guess I can't see the similars of short selling and the type commerce I deal with. Its' not the end of the Earth, nor reason to stress. Enjoyed the chat.

 

[wayneL]

So off topic now, are we not?

Cut throat "war" mongering business I'm in then. Maybe why I didn't see your context of the anology you posted before. My business is non "demographic" dependant. So I must do what I do.

I guess I can't see the similars of short selling and the type commerce I deal with. Its' not the end of the Earth, nor reason to stress. Enjoyed the chat.

It's at a tangent, but not off topic. The analogy is that there are lots of folks who believe short selling is only practiced by the devil's spawn, but what is technically "short selling" is just a part of everyday commerce in the real economy, and couldn't function as well without it.

It only comes up as a topic when the market is down... a convenient aspect to blame, rather than credit problems, declining earnings, etc.

It's a red herring "they" use to deflect attention.

 

[IFocus]

So who thinks short selling is worse/ more unethical than what ANZ are doing with their indiscriminate dumping of shares that may legally belong to others?

And what is ASIC/ ASX doing about this as compared to whinging about short selling?

I thought this was totally ethical........for a bank

 

[blablabla]

Consider the purely hypothetical situation where aggrieved Opes clients won some sort of court case and forced ANZ etc to return all the seized shares they have sold. This would turn the current fire sale of shares into one of the biggest shortselling fiascos in history. The fire sale has driven down the prices of many stocks. Buying the shares back again onmarket would effectively transform the current selling into shortselling. Buying the shares back onmarket could only be done at higher prices and would be rather expensive for ANZ shareholders.

Of course, this possible fiasco is totally hypothetical. The reality is that an astute bank lent Opes a large sum of money, against shares as security. It is normal banking practice to require some form of security. The loan went bad, the bank took possession of the shares and proceeded to sell them off with the aim of recovering the debt. Banks do not care about getting maximum value for assets they have seized. Their business imperative is simply to recover the debt. Any surplus is distributed to other creditors. Banks act for themselves and not for the other creditors. Same thing happens when property is foreclosed because mortgagors defaulted.

The point I am making here is that sometimes shortselling occurs through circumstance rather than through design. Shortselling is a fact of life. If there is a market then there will be shortselling, sometimes in many different ways.

 

[CFD]

Same thing happens when property is foreclosed because mortgagors defaulted.

Things must have changed a lot then. When I had to organise that we had to get 3 registered valuers to provide full written valuations just to set the reserve. Then the auction had to be advertised for X number of weeks in X number of papers including the City and Country press.

 

[CFD]

Here's another angle:
~~
what has just happened is a short sale.
~~
Cheers

Well I don't follow that one little bit.

Whether a retailer has goods in stock, on delivery, has to order them in, or even if he has paid for them at the time the customer enters the store, has got nothing to do with short selling stock as discussed here.

Sorry Wayne you may be right about short selling but not with this analogy.

Bye the way of course the argument only comes up when the market is down and falling. Why would you short when it's up and rising?

 

[Trembling Hand]

Well I don't follow that one little bit.

Whether a retailer has goods in stock, on delivery, has to order them in, or even if he has paid for them at the time the customer enters the store, has got nothing to do with short selling stock as discussed here.

Sorry Wayne you may be right about short selling but not with this analogy.

I think its is the same. You make a sale then a purchase to cover that sale. Aint that far off a short sale. That is selling something you don't own. Sure its not the same but its kinda the samerolleyes

 

[wayneL]

Well I don't follow that one little bit.

Whether a retailer has goods in stock, on delivery, has to order them in, or even if he has paid for them at the time the customer enters the store, has got nothing to do with short selling stock as discussed here.

Sorry Wayne you may be right about short selling but not with this analogy.

Bye the way of course the argument only comes up when the market is down and falling. Why would you short when it's up and rising?

Well a matter of opinion I suppose, but technically no different, IMNSHO.

Buuuut, shorting occurs every single day in the market whether the "broad" market is down or not. In fact, in the index futures, for every long contract, there MUST be a short contract, otherwise the long cannot exist.

The reason it only comes up when the broad market is down, is that "they" are looking for someone to blame. It can't be over-valuation, credit, bubbles, declining earnings prospects, or any fault of those in gu'mint or the institutions. It's just gotta be them evil short sellers. Incredibly, there is even a group of supposedly intelligent commentators who blame short selling for Bear Stearns demise. Not sub-prime, not toxic valueless derivatives, not greed, no no no, it's those evil un-American short sellers.

In the US there is a concerted campaign by the likes of Jim "The Village Idiot" Cramer, to blame the removal of the uptick rule as the reason the market is down. It's rubbish to deflect attention away from his appalling calls lately. (Institutions have always been able to get around it anyway)

Anyhooz, I just realized I've probably started ranting will leave off there.