Who says you don’t kick a dog when it’s down?, asks Lex, as it muses on the latest upheavals in the Australian stock market. Hedge funds and other investors in Australia’s beleaguered stock market are doing just that. Local media are awash with tales of “shorting and distorting”; rumours are running riot and directors who lend their own stock on margin are considered fair game.
Australia is not alone in grappling with possible market manipulation — just ask HBOS — but repeated problems highlight weaknesses in the regulatory framework. Transparency is one of them, in Lex’s view.
The collapse of Opes Prime, a margin lending and client broking firm, has caused havoc in large part because of its unusual model. Rather than simply holding clients’ shares as collateral, Opes used sale and repurchase agreements to in effect acquire the shares. Many of Opes’ clients say they were unaware of this arrangement, which — now the firm is in receivership — has pushed big parcels of shares on to the market.
And according to The Australian newspaper on Friday, Opes built up its business by aggressively courting stockbrokers with high commissions to encourage their clients to give them business.
Brokers with clients who held shares in small companies, particularly Perth-based mining companies, were also targeted, with the clients being offered loans to buy shares that conventional margin lenders would have refused to finance.
An extra twist is that Opes Prime also directly targeted directors of small companies, offering them the finance to keep buying more of their own shares, added The Australian quoting local broking sources.
Lex moves on to the general scaremongering that has been going on in Australia over short-selling, which, it notes, is more nuanced.
In some ways, Australia takes a sterner line than other developed markets. It has retained the tick test, which bans short-selling at a lower price than the preceding sale. Only about a quarter of listed companies are approved for short-selling, so illiquid stocks are out of bounds. Short positions on the bulk of these represent less than 1 per cent of the relevant market capitalisation. Loose definitions of shorting allow substantial under-reporting and there are no alternative ways of tracking these positions. Some 40-50 per cent of borrowed stock is believed to be used by short-sellers but custodians are not obliged to supply stock-lending data. Yet numbers put together by UK-based Spitalfields Advisors show that several casualties of the market turmoil showed higher than average levels of stock lending.
Legislators drawing up new rules have plenty of scope to improve the situation. As ever, the trick will be not to bow to market panic and go a step too far.
Meanwhile, Crikey.com, the Australian news and commentary site, says the failure of the Opes Prime group and the daily disclosures of conflicts of interest, poor administration, indifferent regulation and the overriding air of collusive secrecy, is “enough justification for an inquiry into the Australian financial markets. An inquiry that should scour from top to bottom”.
Australian stock market regulators Asic and the ASX “have been found wanting, in the case of Tricom, the failure of the Allco Finance Group, ABC Learning … the list runs on,” notes Crikey.
Poor regulation and the abysmal disclosure of short-selling and stock lending are the common denominators in all of this. The ASX is a listed company - enough of a conflict to merit some sort of immediate regulatory change - and some of its recent activities in the regulatory area should have brought a please explain from its regulator, Asic, but the regulator seems to be asleep at the wheel.
If an Australian bank was to get into problems — think Bear Stearns or Northern Rock — or if we were to see a trading scandal like Societe Generale that threatened market stability, could we handle it?
At the moment, and looking at the way the powers that be have handled the A$1.5bn, 1,200-client collapse of Opes Prime, you’d have to wonder.
