Chinese regulators have markets exactly backwards.
Late on Thursday they announced an investigation into manipulation by short sellers, while the futures exchange seems to be discouraging people shorting, or betting on price falls.
In practical terms, the action failed: stocks fell again, leaving them down 12 per cent on the week and down more than a quarter from their peak three weeks ago, with extraordinary intra-day swings.
In principle, though, the action is just wrong. The reason the stock market is falling isn’t short sellers, it’s long sellers. More precisely, the hordes who’d been piling into stocks and pushing prices through the roof over the past year are selling, and that was entirely predictable (the difficult issue was when there would be a rout, not whether there would). Read more
It turns out the short position was the result of a typo. So Sylebra isn’t short 11 per cent of AO World after all, the real number is below the 0.5 per cent disclosure requirement.
Have a look at the top of the shareholder register for AO World, the UK white goods retailer which listed in London last year.
Sylebra, a Hong Kong-based hedge fund focused on technology stocks, has sold short 11 per cent of the company. Read more
Dedicated short sellers are a rare breed which has become even rarer in the last five years.
Short sellers have to be patient, but lest we forget a round of applause please to David Stemerman of Conatus Capital for his call to short Africa Bank, the South African listed lender.
The hedge fund manager used his slot at the 2013 Ira Sohn Conference in New York to offer what now looks like a prescient warning. From the FT at the time:
David Stemerman of Conatus was concerned about South Africa, where he said a boom in unsecured lending threatened to turn to bust.
He picked out one institution, African Bank, where he said profits were highly susceptible to a rise in bad loans. He painted a picture of a country where most borrowers needed new loans just to meet the payments on old ones to stay afloat: “Net income after debt service is negative for almost all income groups.”
Gotham’s success in exposing alleged fraud at the small Spanish company Gowex — which filed for bankruptcy at the weekend as its founder admitted to falsifying accounts for the last four years — is likely to prompt some cheers for the plucky short sellers of the world.
Rather than reheating the debate about the merits of short selling, a sometimes icky business thoroughly defended in 2008 and 2009 (here, here, here and here, for instance) how about a different question to which we’d like to know the answer. What examples are there of actual market manipulation that have stuck to the shorters? Read more
The presentation on Quindell by Gotham City Research, which the company has rejected as defamatory, is a long piece of work with plenty of screenshots of the source material quoted.
One such screenshot, on page 36 of the document, is curious for what it might indicate about the construction of that presentation. The purpose is to highlight the author of Quindell’s 2012 annual report, but note the file location.
On Tuesday morning AIM listed Quindell plc was a “technology enabled claims outsourcing business”, whatever that is, worth £2.4bn.
Then Gotham City Research announced an initiation of coverage on the company with a target price of 3p and, well… Read more
Hours (well minutes) of fun courtesy of the EU.
It’s the new disclosure regime for short selling, which involves the FSA publishing a list of the most shorted stocks in the UK. Read more
No doubt the California buyside was up early this morning… checking whether they had any disclosures to make under the new short-selling regulation which affects them.
That would be the European one. Read more
The Globe and Mail has a spectacular report on the arrest in December of a Canadian citizen, Huang Kun, in Beijing. Huang had helped compile a report into a Vancouver-based company called Silvercorp, which is listed in New York and Toronto and mines in Canada and China.
Within days he was in Luoyang, in China’s central Henan province, being interrogated by officers from the local Public Security Bureau, or PSB. The Canadian citizen has been prevented from leaving China for more than eight months, and was made to pay $32,000 in a form of unofficial bail, before being re-arrested in July. Mr. Huang’s lawyer, Wang Yuehong, believes he will be charged any day now with “disseminating false facts to impair another person’s commercial reputation,” a criminal offence that carries a maximum punishment of two years in prison. If charged, Mr. Huang’s chances of winning his argument in court are exceedingly small: conviction rates in China are above 98 per cent.
A couple weeks ago, FT Alphaville asked who’s “buying” the rally in US equities. We also noted that volumes are low not only because its August, but also due to a trend that’s at least a few years old. Now we ask, are the shorts hanging on or is it more a question of piling in?
Andrew Wilkinson of Miller Tabak decided that with major indices hitting multi-year highs, it’s a good time to look into which sectors have the most short interest. Here’s what he found: Read more
Dearie me – what an atrocious headline.
Five months in and it’s been a pretty good year for hedge funds with the HFRI fund weighted composite index up 4.4 per cent year to date, following its strongest first quarter performance since 2006. The index fell 5.25 per cent last year.
There was a small 0.36 per cent fall last month, but it’s unlikely to deter investors who have been scrambling to take advantage of the strong start to the year. Total hedge fund capital reached a dizzying record $2.13tn at the end of last quarter on a mix of performance and net inflows, according to Hedge Fund Research estimates. Read more
Credit Suisse is offering its hedge fund clients off-the-shelf products that allow traders to replicate hypothetical gains made by betting against European stock indices that include equities covered by eurozone short selling bans, the FT reports. The bank has made five shortable baskets “optimised” to track leading European indices as closely as possible, based on replacing restricted stocks – mostly banks and other financial companies – with correlated assets. A sales document from last year says the optimised baskets at the time tracked the full indices in some cases to within fractions of a percentage point. The document highlighted that the baskets specifically excluded the restricted stocks.
In his latest move to support the development of China’s capital markets, Guo Shuqing, the newly installed head of the China Securities Regulatory Commission, will oversee the creation of a new body to
control facilitate short-selling. The regulator is also going to be the largest shareholder of the new organisation.
FT Alphaville tips our hat to this rather neat piece of controlled capitalism. The venture will likely be a nice little money spinner for the CSRC, once the fees and transaction costs start rolling in. Read more
China is poised to unveil measures to bolster the country’s nascent short-selling industry in an effort to deepen its capital markets, according to securities officials and fund managers. The FT reports that Beijing will create a new body called the Centralised Securities Lending Exchange to facilitate short selling as early as this quarter. China Securities Regulatory Commission, the market regulator, will be the largest shareholder in the body, which was first mooted last year. China embraced short selling in 2010, but efforts to promote its use have been hampered by the limited number of shares available for qualified asset managers to borrow. The new centralised lending exchange will make shares available to qualified fund managers in China who wish to borrow them, for a fee. It will source the shares from institutions in China including banks, insurers and fund management firms.
UBS agreed with the SEC on Thursday to pay $8m to settle allegations that it pervasively violated short selling record-keeping rules aimed at preventing abusive trading, the FT reports.The settlement followed the bank’s agreement to pay $12m last month to settle related short selling violations with the Finra, a self-regulatory organisation. As part of its cease and desist order with the SEC, UBS agreed to retain an independent consultant and did not admit or deny wrongdoing. According to the SEC, since at least 2007, UBS’s lending desk kept inaccurate “locate” logs. The practice was “pervasive, extending to every security handled by the lending desk”, the SEC said. The case alleging violations of the short selling rule known as “Reg Sho” is likely to be the first of several, says the newspaper.
It has been posited that short squeezes might be behind some of the rallies we’ve seen recently.
It would help to explain some of the macacque-level volatility and the markets’ willingness to rebound at any vaguely positive headline with Merkozy in it (Bruni-Sarko baby news, anyone?). Read more
A permanent ban on so-called naked credit default swaps is to be imposed across the European Union after lawmakers reached a deal to restrict the sovereign credit insurance to investors seeking to hedge long positions, reports the FT. Following more than a year of difficult and erratic negotiations, the European parliament and member states on Tuesday agreed curbs that will increase transparency and significantly tighten rules on traders short selling bonds and shares and buying credit insurance. Most controversial will be measures – strongly advocated by Germany and opposed by the UK – to stop traders buying sovereign CDS as a straight bet rather than as a means of reducing risk exposure on other underlying positions, a step critics argue will further increase sovereign borrowing costs.
In a coordinated move after Wednesday evening’s close, the European Securities and Markets Authority announced an extension of the short selling bans in place for selected financial stocks in France, Italy, and Spain. The bans started on August 12th.
FT Alphaville can imagine that this may cause a certain amount of quick-and-decisive-action envy among European politicians. If only everything were so easy to solve and uniformly implemented. (Sigh) Read more
Spain, Italy and France have extended bans on the short selling of select banks and other financial stocks, the FT reports. The French and Italian prohibitions are slated to last until November 11, while the Spanish rule remains in force until “market conditions allow” it to be lifted. Together, the bans cover more than 55 companies. Belgium also participated in the initial ban and an extension announced in late August. That prohibition is due to expire on September 30, but the FSMA, its regulator, had not made any announcement about an extension on Wednesday. Greece has a separate prohibition in place.
Short-selling interest in S&P 500 stocks has reached its highest since November last year as investors piled on bearish bets in the past month, underlining the scale of the sharp switch in market sentiment, the FT says. Until last month, shorting interest had fallen to its lowest since at least 2008, according to Data Explorers, which tracks stock out on loan, considered a proxy for shorting activity. But in the past month, loans have risen and now more than 3 per cent of the index’s total market capitalisation is out on loan, the group said.
Short-selling bans on selected European bank stocks have been extended by regulators until the end of September in an unprecedented degree of regulatory co-ordination, the FT reports. French, Spanish, Italian and Belgian regulators said the bans, which cover nearly 60 companies and were first introduced two weeks ago, were still necessary to calm excessive market volatility. Short-sellers, who aim to profit from price falls, are a frequent target of regulators and politicians during market turmoil. The current clampdown came after the Autorité des Marchés Financiers, France’s regulator, became alarmed by a spike in the trading of bank stocks such as Société Générale, which slumped 15 per cent the day before the ban was agreed. Regulators on Thursday said they would review the restrictions next month. “The aim is to lift the ban as soon as market conditions allow it,” the AMF said. An analysis of trading volumes by the Financial Times has shown that dealing in bank stocks across Europe nearly doubled in the five days preceding the ban as worries grew over banks’ stability.
Short-selling bans on selected European bank stocks have been extended by regulators until the end of September, in an unprecedented degree of regulatory co-ordination, the FT says. Regulators on Thursday said they would review the restrictions next month. “The aim is to lift the ban as soon as market conditions allow it,” the Autorité des Marchés Financiers said. An analysis of trading volumes by the Financial Times has shown that dealing in bank stocks across Europe nearly doubled in the five days preceding the ban as worries grew over banks’ stability. Dealing in the banned stocks has since dropped 62 per cent from its pre-ban spike, according to Bloomberg data. This has however left trading at just three-quarters of its pre-spike average. The drop in liquidity implies investors will pay more to buy or sell those stocks.