This information vacuum has created a lot of confusion and rumour around the role securities lending has played in some of the spectacular company devaluations over the past few weeks. Faulkner says he is supportive of greater transparency – that is one of the things his business was founded to achieve. Spitalfields attempts to pull together information on global activity in the lending market so that practitioners in the industry can better understand their relative performance and market share. But rather than curbing the activity of recent weeks, Faulkner believes that greater transparency will only remove the blame from the securities lending industry.
“Take ABC Learning for example,” he says. “In January 2007, 86 per cent of the available stock was on loan, at which time the company had seen no negative impact on its price. Is it possible that the volumes associated with short selling took six months to work through? Or is there another reason that the price has fallen? If something is structurally wrong with a company, it doesn’t always manifest itself quickly. Some of the people who were short ABC Learning last winter may have sat on that short position, and taken the pain of the cost of borrowing and sat it out and really have been vindicated in the last few weeks. This idea that borrowing a stock to sell it short drives the price down – if life were that easy, everyone would be a hedge fund manager.”
Tom Elliot, managing director and co-founder of MM&E Capital, a hedge fund, agrees. “If you look at the companies who have attracted a lot of shorting, it is companies who are in trouble, whose business models aren’t good. Shorting may get the share price to where it was going to quicker than it might otherwise do, and might exaggerate the share price movement a little bit, but a short seller or even a group of them by themselves can’t create a false value for a stock.
“People say short selling should be disclosed. Fine, it wouldn’t make any difference if it was disclosed. If we lived in a world where everything was disclosed, say ‘okay, 30 per cent of this company is being shorted’. How would that help anyone? It wouldn’t tell them anything more than what the lowly share price does – that the company’s in trouble.”
Long-only managers argue that if every short position had to be reported, it would be possible to see short positions building up over time. It would help balance out the market. However one manager, when asked why he would want such information, simply replied: “It would tell me if someone knows something I don’t.”