So it should hardly have come to a surprise that once the UK and US introduced limited bans that the Australian market should follow. D’Aloisio must have been preparing himself to be the hero of the markets once the announcement was made on Friday evening. Acceptance speech prepared, there wouldn’t have been a dry eye in the house.
Then the bubble burst. Reading today’s papers you would think that the mainstream press, commentators and fund managers have been supportive of short selling all along. Almost every article is either critical of the ban or quotes those that are.
It didn’t help that ASIC managed to royally stuff things up. To the extent that the ASX had to delay the market open yesterday while ASIC released a clarification of the new rules.
Bearing in mind who principally does short selling – larger or more sophisticated investors and institutions – banning the practice on the ASX will probably only have minimal effect.
The War on Evil
We have been checking the ASIC website this morning for new press releases.
We are especially looking out for one signed by ASIC chief executive Tony D’Aloisio.
If one does appear we think it may read something like this:
*** Press Release ***
Re: Short Selling Ban
Dear All,
I THOUGHT IT WAS WHAT YOU WANTED! THAT’S WHY I DID IT!!
Love,
Tony.
ASIC
You could hardly blame him. At least for the last year the newspapers have hardly gone a week without either a commentator, analyst or fund manager describing short selling as ‘evil’ or ‘immoral.’
We’ve been told that short selling is responsible for all that is wrong with the world of finance. We’ve been told that poor innocent companies like B&B, ABC Learning and Centro would have been fine if it wasn’t for the short sellers.
Alternatives to Short Selling Shares
We mentioned yesterday that a reasonably simple alternative to short selling shares is to create a synthetic position using a sold call option and a bought put option. Aside from that, the institutional investors will have access to the Over The Counter (OTC) markets.
An OTC market is one that is not traded through an exchange. My old mob, CMC Markets is a classic example at the retail level. Because they do not have to hedge all of their CFD transactions through the physical market they can allow traders to short sell and just hedge that position off against traders taking the opposite view. So far they seem to be the only CFD provider that is able to allow short positions over ASX listed shares.
Institutional investors can do the same thing. Fund A contacts their bank/broker saying they want to be short Macquarie Group shares, so they just hedge that off against Fund B that wants to be long.
The rallies on Friday and Monday would seem to have “dead cat bounce” written all over them.
Traders Go Long Oil
What’s another way that sophisticated traders can produce a synthetic short position in the stock market. Buy crude oil perhaps. Is it any coincidence that the day after the short restrictions in the US and UK come into force that crude oil has its largest one-day price rise ever?
During trade in New York, the price of crude reached USD$130 a barrel. Yesterday, the price was barely above USD$100.
What difference does that make if you can’t short stocks you may ask? Well, the restrictions only prevent new positions being taken. Supposing you are currently short financials in the US and want to maintain that position, but you can’t short sell any more, or if you close out your position you can’t instigate a new one?
What better way to push those prices down than going for an all out splurge in the oil market. It would certainly have helped that the October crude oil contract expired yesterday meaning that traders who were short would have had to buy back in to cover their positions.
Even so, regulators hardly need to be reminded about the sophistication of modern markets. Any attempt to curtail activity in one area of the market is only likely to lead to traders switching to other strategies and markets.
Cheers.
Kris
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