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Selling us short

Is short selling really bad for your investments' health?

There’s been plenty of debate about the rights and wrongs of short selling, but while regulators ponder intervening in the CDS market, they seem quite happy for the shorters to continue their trade.

My position is simple. The bond and equity primary market is a long market, and is supported by secondary market trading that I also see as fundamentally long investment. If someone wants to speculate on the depreciation (or appreciation) in the price of an equity, a bond, property or even a Premiership footballer – there are plenty of derivative contracts or spread betters that will meet their needs.

There is a weak argument that borrowing the stock and selling is more cost effective than using a synthetic instrument, but that doesn’t really hold water. Derivative trades and spread bets don’t have the same impact on the confidence of investors as short-selling in the cash market. When you see a leading UK financial PLC short sold by 6% of the issued stock, I don’t think there’s any real doubt that the market is being manipulated. Yes – sometimes the shorters get their fingers burned, but more often than not they don’t.

While they wring their hands over CDSs, the regulators seem to be happy to allow the practice of short selling in the cash market to continue, so I’ll tell you what my plan is. I’ll going to ask my asset manager if they lend stock to support short selling - if they say they do, and they plan to continue, then I’ll move my investments elsewhere. If all of the major asset managers stopped lending other than to support efficient settlement, the shorters would find it much harder to continue to profit from driving down the value of my hard-earned pension plans. I got my answer...

Hugh Cumberland

Product Strategy Director; BT GFS

2178

Comments: (1)

A Finextra member
A Finextra member 10 February, 2009, 20:30Be the first to give this comment the thumbs up 0 likes

Solution is simple and Porsche implemented it - buy stock back! Or offer an insurance against short-selling attacks as it is almost sure way to win.

In a current situation short sellers will almost always be successful due to volatility of the market and fear.

Start short-selling, the market will go down (and  some algo-boxes will just increase the speed at which the price is deteriorating), rating companies will lower credit rating, that will further increase a pressure on a company and share price and so on...

A sure way to kill a company!