FYI | Sep 29 2008
By Andrew Nelson
As soon as short-sellers started taking the brunt of the blame for driving down share prices in major financial firms like Lehman Brothers and Bear Stearns, charged with reckless profiteering and even market manipulation, some kind of action was always going to be taken by regulators given the deteriorating state of financial markets.
It’s now been a week since the SEC and other regulators in Australia, United Kingdom, Germany and Canada imposed temporary bans on the shorting of financial stocks. What’s been the result?
That depends on who you ask.
Sure, investment banks have stopped dying and the big falls that markets were experiencing the week before last have stopped, but most would agree that after the initial gains from short-covering, recent market stability is due more to the announcement and evolution of “The Plan” than it is to do with the current bans on short-selling.
Locally, what we ended up with is confusion, clarification, more confusion, more clarifications etc… And all the while volumes are declining and the local market’s reputation is being questioned by international fund managers, with much of the blame being levelled at ASIC boss Tony D’Aloisio.
It started Friday last week, when ASIC said it would look at a temporary ban to just prohibit naked short selling. The regulator also announced moves that would improve clarity by requiring the regular reporting of covered short positions to increase transparency of short trades. Most traders welcomed the news.
But after the SEC and Britain’s FSA announced broad measures to ban all shorting in financial stocks, ASIC’s hand was forced and over the weekend the regulator banned all short selling on all stocks, not just financials. The move, that some labelled as a knee jerk reaction, was undertaken by ASIC to protect Australian markets from short-sellers the world over that would now be looking for new markets to short after being denied access to the US and UK.
ASIC was expecting a stampede if it didn’t move and move decisively before markets opened on Monday.
The move caused havoc locally and much of the ensuing confusion surrounding short-trading still persists. Trading started late last Monday as ASIC fielded a tidal wave of queries about exemptions, and the Government has since followed up with a succession of changes and exceptions that have, if anything, caused even more confusion, uncertainty and frustration.
Locally, hedge funds are feeling the worst effects and doing the most crying, with many in a holding pattern until there is more clarity about how they can run their normal long and short operations. This is definitely impacting trading volumes on the ASX. There is talk that the ban could be either fully or partially lifted before the 30-day review, but ASIC there is no word from ASIC on this.
Hedge funds are also suffering in the US, but their pain is more about how to provide the clarity that is desired from regulators. As of Monday, fund managers will have to begin disclosing their short positions to US regulators. Under what is at least for now a temporary order, the SEC is asking big-money managers to reveal the number and value of securities sold short each day last week.
In the UK, the FSA has also imposed a similar disclosure rule and is requiring investors with an existing short position above 0.25% of a financial company’s share capital to declare the size of their holding every day.
But fund managers and short sellers alike are bemoaning the move, with arguments abounding that it would be like KFC revealing all of the Colonel’s secret herbs and spices. The argument is that once their secret trading ingredients are made public, anyone will be able to copy their proprietary trading strategies, making them all but useless.
The SEC plans to sit on the information for two weeks, but then make it public. Fund managers are now banding together to see if the information can be kept private as the regulatory framework evolves. Regardless, Monday will see fund managers and other short-sellers submit a form that includes all short position at the beginning of the day, the number of securities sold short, the value of the securities sold short, and the short position at the end of the day.
That’s a lot of forms to be filled out.
