Short sellers and securities lenders have remained calm in spite of controversial short selling bans for bank stocks introduced in Europe this month, the FT reports. Securities lending data show that the amount of stock on loan – used as a proxy for tracking the scale of short positions – has dropped just 0.1 per cent on average since immediately before the 15-day prohibitions on shorting bank stocks were announced by France, Spain, Italy and Belgium. The latest figures, provided by Data Explorers, also show that, on average, just 2.35 per cent of each stock is on loan. The low numbers will fuel the pro-shorting lobby’s argument that shorting is not the problem, not least because bank shares have continued to decline.
The German government on Wednesday made good on its pledge to crack down on financial speculators by agreeing to block the speculative “naked” short-selling of German stocks and eurozone sovereign bonds. However, it stopped short of banning speculative trading in euro currency derivatives, although the bill approved by the cabinet will allow the market regulator Bafin to impose a ban in case of market turbulence, the FT reports.
Germany on Tuesday stepped up its campaign against short selling, and according to the Handelsblatt, is moving forward at speed (via Google Translate):
The federal government wants to ban naked short selling of shares, government bonds in the euro countries and insurance for risks of states in the euro area. Unlike previously planned, but these prohibitions are regulated in a “Law to strengthen the stability of financial markets” and no longer be part of the proposed Investor Protection Act. Read more
It’s the morning after Germany banned naked short sales of key financial stocks — and markets seem not to have liked it one bit.
First, reaction in Germany, as the protected stocks took a hit. Flashes, via Reuters: Read more
Germany on Tuesday temporarily banned short selling of debt issued by eurozone countries, according to a statement by the country’s financial services regulator. BaFin cited “extraordinary volatility in debt securities issued by eurozone countries” in its rationale for the move. The ban also extends to so-called ‘naked CDS’ on eurozone debt, and to naked short sales of the shares in ten financial institutions, including Deutsche Bank, Allianz and Commerzbank. The announcement saw the euro slip 1.6 per cent to a fresh 4-year low of $1.2162.
Here’s the FT Alphaville translation of the statement by the German financial regulator on its move to temporarily ban certain naked shorts:
The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS). Read more
Well, not quite, FT Alphaville writes. But shorting specialists Data Explorers did come up trumps on Monday with a report which took a global perspective on the last twelve months’ short positions. Equities were out — but corporate bonds are in. Read more
Funny. The Ides of March isn’t until the 15th, but it looks like everyone’s out to get CESR.
The Committee of European Securities Regulators has already drawn fire for its short-selling disclosure proposals, which FT Alphaville previewed on Tuesday. Read more
Hedge fund manager, and experienced Ponzi hunter, John Hempton has launched a withering attack on the “flim flams, stock promoters and other market slime-bags” who want naked short selling banned.
He reckons this crackdown on a phoney problem is costing US taxpayers at least $1bn. Read more
Interesting Chart of the Day here from Bloomberg. The blue line is a basket of the 32 financial stocks that the FSA banned from short-selling in September. Together they declined 28 per cent since the restriction came into effect. The purple line is the FTSE All-share, which fell 8.4 per cent in the period. For added
humiliation measure, the green line is RBS — the worst performer of the 32 companies.
US regulators’ move to restrict “naked” short selling in 19 financial stocks had little impact on prices according to a study, although trading was down 63 per cent during the period the rule was implemented, Reuters reports. “While the SEC’s intentions may have been good, their attempt to protect price with rule-making was quite flawed and without intended effect,” said John Standerfer, Vice President of Financial Services for market data firm S3 Matching Technologies. “The market has its own mind.” An S3 study of market data showed short sells for the 19 stocks dropped by about 63 per cent while the rule was in effect, but the firm concluded the rule was “ineffective,” saying short selling “did not seem to be a significant factor” in the market’s determination of price for the stocks.
The cost of borrowing shares for short sales on Wall Street has been rising steeply in recent weeks, hampering the ability of hedge funds and other sophisticated traders to profit from market declines. The SEC on Tuesday revealed emergency action to clamp down on abusive short-selling, making it more difficult for traders to engage in so-called “naked” short sales of leading financial firms. Shares sold short rose four-fold to $5,000bn in the three years to 2006, according to research from the London Business School, and the price of shorting rose about 300%.