According to David Bryant, chief investment officer at Australian Unity, neither stock lending nor short selling are inherently bad. “Short selling with transparency and within limits I have no problem with – I agree that would aid liquidity and allow people to take different views. “But I don’t accept the rationale that short selling helps to find the real price of a company, I think it finds a very different outcome, and we need transparency around what the loan positions are.”
Bryant argues that the lack of transparency creates an uneven playing field between long and short managers. “A short seller can borrow stock with a five per cent margin in, short sell it and take the sale proceeds, so the net capital out is 5 per cent. That’s 20:1 leverage. With no transparency around the net lent position, the long managers don’t know how much of the selling is coming from people that own the stock and are saying ‘that’s a fair price to sell at’, an important piece of information, versus people that don’t own the stock – have never owned the stock – and are simply trying to push the price down to a particular level. People are trying to tell me that this gives us an efficient market… I don’t accept it.
“We’ve got a credit squeeze, a nervous market, limited capital available, and the short sellers are not balancing the stock out,” he says. “Companies with sound underlying assets are being pushed against the wall. Prices have been driven so low that it’s triggering restructuring elements. Normally a company in that position could refinance, but in a global credit squeeze it can’t. It is a combination of market issues and economic issues. It’s not to say these companies haven’t made mistakes, and there shouldn’t be some price adjustment, but should they be pushed to the brink?”
Simon Bonouvrie, portfolio manager at Platypus Asset Management agrees there is no problem with securities lending and short selling – as long as it takes place within the ASX rules. The rules on short selling are designed to stop manipulation in the market and to stop deliberate bearing down of a company. “Through stock lending and unreported short-selling, these rules are being circumvented,” Bonouvrie says. “Hedge funds are probably out there hunting for margin loan levels deliberately to trigger more margin calls.
The ASX shorting rules, which are similar to the US and Canada shorting rules, are there to protect both issuers and investors. However, hedge funds and proprietary trading desks are not always transacting within these rules.” Don Williams of Platypus AM adds “you don’t have to be Einstein to realise there has been some serious price manipulation over the past few months”. The ASX monitors naked short-selling daily, but it is no secret that this accounts for only a fraction of the short selling actually taking place. Part of this is to do with the misnomer “stock lending”. Several years ago, a law was created that allowed the transfer of legal ownership of securities from a lender to a borrower for up to 12 months. As the “owner” the borrower does not have to abide by any short selling rules, or report to the ASX because they are deemed to own the stock.