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FSA burns hedge funds

Robert Peston | 10:10 UK time, Friday, 13 June 2008

The Financial Services Authority has this morning burned a few hedge funds and short sellers.

The City watchdog's clampdown on short-selling during rights issues has led to sharp rises in the share prices of HBOS and Johnston Press, both of which are in the middle of the process of raising new capital through rights issues, and of others - including the builders Taylor Woodrow and Barratt - which are thought to have been considering rights issues of their own.

If this doesn't prevent HBOS's £4bn issue of new shares being dumped on its nervous underwriters, nothing will.

But there's a bigger point: if you want evidence not only of the irrationality of markets but of individual market participants, the FSA's squeeze on the hedge funds is it.

As I mentioned in my blog on how short-selling is damaging the financial health of our banks, there was an opportunity here for the big institutions that look after our long-term savings to turn off the tap that allows short-selling - and in the process of turning off that tap, to help themselves and their clients.

Hedge funds that short-sell shares depend on their ability to borrow the relevant shares from giant insurers and pension funds (short-selling is selling stock you don't own, in the expectation that the price will fall and you will be able to buy the stock back for less than what you sold it for).

But although the giant insurers and pension-fund groups receive a fee for lending shares, they and their clients are damaged by the short-selling facilitated by the lending - in that during a time of market hysteria, of the sort that exists right now, a fall in a company's share price caused by short-selling can lead to a significant increase in its cost of capital, which can do it permanent damage.

In other words, the process of lending shares by a pension fund or insurer can lead to a permanent fall in the value of those shares, to the detriment of the pension fund or insurer - and more germanely to the detriment of their clients (that's you and me, by the way, or those of us saving for our retirement).

Which is why the FSA spoke to the big pension funds and insurers and suggested that the best way to curb the worst excesses of short-selling would be if they voluntarily stopped lending the stock.

And what's extraordinary is that these big institutions refused to do so.

That's quite shocking. It makes them look short-termist and thick.

There's a reputational issue here for their trade bodies, the Association of British Insurers and the National Association of Pension Funds.

Perhaps they should now put in place their own code of practice to restrict stock lending during a rights issue - because surely it would be more of an indignity to have that forced on them by the FSA, as it implies this morning that it will do.

More pressing perhaps is a serious financial issue for a number of hedge funds.

The FSA has announced that they have precisely a week to reduce their short positions to less than one quarter of a percentage point in companies that are trying to raise capital with a rights issue.

If they don't, their shorts will be disclosed for all to see - and they'll be vulnerable to attempts by other hedge funds to push up a relevant company's share price and thus generate losses for competitors with short positions.

If the short-selling hedge funds are mashed in what might be described as bull raids, they're unlikely to attract much sympathy.


  • Comment number 1.

    An article I can fully agree with.

    But why limit the announcement of significant stakes to just firms in a Rights Issue ?

    If an Investor buys a large stake through the usual method then an announcement is made through the RNS to the whole market, including the Small investors if they read the RNS feeds.

    Would it not be better if significant long or short positions were announced that way for all companies affected, whether or not they were in a Rights Issue ?

    This would make Market manipulation by Paper Tigers that bit harder.

    The FSA have a great opportunity here to show their true worth and establish a stronger reputation, I for one, hope they achieve this.

  • Comment number 2.

    Conventionally, it has usually turned out for the best if markets are left to their own devices.

    However, the systemic abuse of the system is now really damaging the 'little people' i.e. most of us.

    Therefore on this specific occasion, I am in favour of regulatory action.

    Sometimes, human greed simply has to be reined in for the 'greater good'.

  • Comment number 3.

    What crap argument you put forward again.

    So I your view, prices can only go up. If the foolish bank wants to overpay for assets.

    In terms of excessive mortgages against houses that are not worth. Excessive loans to private equity companies without looking at the long term.

    In your world there is no correction.
    Funny why the Pension funds and other did not agree with the FSA.

    You know where you and the FSA are talking from. I think both of you have no link to real world finance.

  • Comment number 4.


    For some of us to understand the implications of your article can you provide an explanation as to why the big institutions refused to stop lending the stock?

    Until that is explained it is difficult for the readers of your BBC blog to gain a reasonably full understanding.

  • Comment number 5.

    You are muddling up two concepts - undue market influence should rightly be addressed through disclosure, whether short or long - but attempting to restrict short selling per se (or stock lending) is no different to encouraging hoarding of shares in an attempt to prop up prices artificially - itself an attempt to excert undue influence over the market. Seems like the FSA (and Robert) have got themselves into knots here, and the fund managers have got it right.

  • Comment number 6.

    > It makes them look short-termist and thick.

    Yes, this makes the bosses look even thicker and more short-termist than they did already.

    Did Societe Generale behave intelligently? Did the former bosses of Northern Rock (etc.) test their business model for longevity? Did the bosses and shareholders at Bradford and Bingley test their expectations against a wide range of medium term outcomes, or did they wear rose-tinted spectacles?

    So they are short-termist, but they are not thick. In business, the idea of bosses is to "grab that cash and make a stash", preferable before the punters (both the public and the shareholders) notice that the wheels have fallen off the cart. That is why we cannot allow business to "do it's own thing". That is why, in previous generations, we shackled it into a harness and told it what to do with a whip.

    It looks like things have finally run their course, and our forefathers were right after all. It's time to get that old harness and whip out of the barn.

  • Comment number 7.

    It is very reassuring to see the regulators had at work doing what is necessary to keep the system stable.

    There is no doubt that profits can be made from market instability but it behoves the financial industry to realise that they are now being propped up by the taxpayer and so it is reasonable to expect them to behave themselves as a consequence.

  • Comment number 8.

    Does amaze me how free market economics is no such thing.
    They play with their principles all the time for expediencies sake.
    In reality market controls are only an extension of law to prevent gentlemanly rules and principles being ignored by ungentlemanly economists hell bent on profiteering at any costs.
    So if market controls work to prevent excesses in market manipulation, then perhaps other market controls could be enacted.
    How about a 100 fold limit against average wages to none owner executives of a company. After all they are just employees like the rest. How about completely transparent performance targets, payed on a 5 year cycle based on the actual difference they have made to the balance sheet. Add in a bit of long term organic planning rather than short term profiteering for bonuses sake. Perhaps the fear of losing their jobs should be sufficient motivation to success rather than an excessive share of shareholder returns.
    But hey, surely it is too much to have the regulators of our economy actually do something constructive to ensure an equitable representation throughout society.

  • Comment number 9.

    Surely the pension funds don't mind if the share price drops in the short term. Pension funds are in for the long haul, so if the price drops now only to increase later (some years away) back to its higher price, they'll end up in the same position, and have made some money out of landing their stock.

  • Comment number 10.

    I am Chief Executive of the International Securities Lending Association, which represents participants in the securities lending market: beneficial owners, their agents and borrowers.

    Mr Peston needs to explain how 'the process of lending shares by a pension fund or insurer can lead to a permanent fall in the value of those shares, to the detriment of the pension fund or insurer ' If short selling caused the price of their shares to fall below fair value, other investors would quickly take the opportunity to buy. What is the market inefficiency that prevents buyers stepping in if short sellers (or indeed sellers who own the shares outright) have driven the price down below fair value?Academic studies on this subject have shown the opposite - banning short selling makes markets less efficient, with prices adjusting more slowly to reflect underlying news.

    It is also important to understand that only a small percentage of lent securities are used to cover directional short sales. Securities are also borrowed for many other reasons: for example, to avoid settlement fails, by market makers in order to provide liquidity to buyers, and to enable arbitrage-related activity: for example, to go short individual shares versus an index-based basket.

    Pension funds and other investors lend shares in order to earn additional returns at low risk. If they decide not to lend they miss out on that return, to the detriment of their investors. It is not clear that the underlying share price would be affected one way or the other. But one certain consequence of reduced securities lending would be to lower market liquidity. Particularly at present, that is the last thing that any investors should want.

  • Comment number 11.

    If hedges could not short sell anymore they'd find something else to to put their money into ...regardless of the consequences for the economy in the medium or long term commodities for example.

    Oh they have ...oh dear!

  • Comment number 12.

    10's post, of course, assumes that markets are basically rational. An assumption that history doesn't tend to support.

  • Comment number 13.

    Poster #10 appears to be a professional in this sphere.

    He reminds us that this market model is extremely complex and regulatory actions on that model may well turn out to have unintended consequences.

    So the question then becomes - are the FSA a competent body to decide upon and administer such regulatory actions?

  • Comment number 14.

    What I don't understand in this situation is who buys the shares that are being sold short.
    Is it the same institutions that are lending them out?
    That really would be the height of stupidity.

  • Comment number 15.

    I remember some weeks ago when there was some serious skullduggery involving HBOS shares, Mervyn King, rightfully incensed, ordered the FSA to locate the source of the mis-dealing. What happened to that enquiry? As far as I am concerned, short selling is yet another unacceptable face of capitalism which is rife in the city - and I am a capitalist.

  • Comment number 16.

    And it all looked so logical until the ISLA chipped in, but is that a trade organsiation for the good of its members or a cinsumer organisation for the ultimate investors?

    The "Long term view" would say that a price reduction - even if due to shorting - is good for the buy side of fund managers because it would bring the average price down. But is it any good for the investors?

    Are the stock lenders really making a better return on HBOS investments because they loaned them to short sellers than if they retained them - maybe for their own turnover and commisions - but for investors?

    I can see that some stocke lending is required - for arbitrage etc. - but to lend massive amounst of stock when its being heavily and obviously shorted - that has got to borderline on the integrity of fund managers.

  • Comment number 17.

    Well done Peston!!. At last u are looking at both sides of the coin
    Well done even more the FSA .This is only the start of the new era of policing the markets .
    I am sure there will be alot more to come to keep our hedgie boys on their toes.

    Wait till the governments , especially the new Mr Obama of the US to make his presence felt.

    Now is the time to take money out of hedge funds and return to the real world of longer term investment strategies. The economic world will become a better place to invest in.

    Next up will be actions against our oil producing nations!! You heard it hear first .We amy have to wait a bit but it is going to happen

  • Comment number 18.

    Robert, the FSA has shown it does not understand what is going on. With so many declard principal traders and hedge funds churning shares every day, the ability to go short is an entrenched necessity.
    For those who have chhosen to underwrite it is for them to set the level they believe they are happy with.
    If others feel differently there will be a challenge to the perceived discount.
    Declaring who has sold short is of no consequence as the total short position can be established already.
    Does this mean by definition that all long positions are also declared or limited to a quarter of a percentage point!.
    There is a far more efficient manner by which to 'limit' over zealous operators and that ios to insist the margin to finance the required short value sell is raised. i.e You may be a covered short of considerable size but you have sufficient capital deposited to protect any move in the share price if it went againt you.
    Lets not forget the clearing system nets out a firms long v short positions so what the FSA is doing is quite frankly dopey!
    It is important that those who seek to egulate understand the way the market has operated for yearrs and it is utterly insane to complain when a share price is going down yet leave alone when it goes up.
    That is not how markets work and it is worrisome that Clara Furse has not told the FSA to get back in its cage before it makes a total pigs ear of Londons deeded predominant position.
    This move has all the earmarks of a stalinist interfering government department who has no knowledge of the damage it causes or for that matter cares, sounds familiar?

  • Comment number 19.

    Your "short-termist and thick" comment has, I'm afraid, gone a long way to reducing my respect for you.

    I suspect that the fund managers in question could point to many, many, examples in which lending shares has improved the returns for their pensioners AND helped balance their risk/exposure profile.

    Surely there are three supportable positions:

    - Ban short sales altogether (and run the risk of driving hedge funds overseas)

    - Laisez-faire

    - Insist that ALL short positions/share loans had to be published.... It's hard for anyone to make a serious argument that extra transparency would be anything other than an overall benefit to the economy.

    Personally, I lean to the third :-)

    ... however, creating a two-tier system in which the FSA could decide which companies had "protection" and which didn't isn't going to help anyone?

  • Comment number 20.

    I think people need to remember the primary purpose of a capital market (equity).

    The primary purpose is to enable quite large businesses to raise funds amongst a very large number of Investors, who then are able in a democratic fashion, to share in the profits (if any) of the business.

    This purpose requires:

    Clear Disclosure relating to the Equity;

    Confidence in a fair valuation on the market;

    Trust in the institutions overseeing and creating the Market.

    If the mechanisms of the Market result in wildly fluctuating prices, Capital will not be invested.

    If the Institutions of the Market indulge in unfair practices that result in destruction of Shareholder value, then again Capital will not be invested.

    If people do not trust the market to behave rationally again Capital will not be invested.

    In the end the Market needs Rules.

    These Rules establish Trust.

    Trust attracts Capital.

    Capital is the whole point of the Equity market.

    Without it, there is no market.

    Supply of Equity to the Market is a decision of the Owners of the Equity. Hoarding does not apply people are either prepared to sell at that price or not.

    If their Equity is lent without their knowledge at profit by their Agent (the Insurer, Pension Fund, Nominee account), then there is a conflict of interest.

    An Agent should be trusted to put the interests of their Client first.

    So a Client whose Shares are at a much lower Value because of Stock lending would be well within their rights to feel aggrieved.

    A Markets price is determined by what the Owners and Buyers are prepared to pay, it should not be manipulated for advantage by non Owners of Equity.

    This is not the same as providing small loans of stock to maintain a Market.

    When huge percentages of Stock are lent it is a sign of manipulation not liquidity.

    Suspicion will always arise when big deals are struck after Market Price manipulation involving Stock Lending and Shortselling (on a massive scale).

  • Comment number 21.

    Rights issues are funny things and rely upon confidence to a large extent. It is the market that decides.

    This kind of FSA intervention looks and smells like panic, and is probably doomed to fail. The market makers have found ways to circumvent such regulation before and they will again. How do you control the actions of offshore funds setting up quasi arms length special investment vehicles? I think you can't.

    If any of the current rights issue are to land up with underwriters then so be it. I believe various other large companies would like to get a rights issue away, but it seems that the appetite in the market has priced them up (i.e. a bigger incentive is needed - a bigger discount on the share price.)

    The johnny-come-latelys have missed the boat for cheap issues and will have to accept that it will cost them more to refinance their balance sheets. That's capitalism.

  • Comment number 22.

    The behaviour of one or two Hedge Funds reminds me a bit of School yard Bullies.

    They are Big, they use their Muscle to intimidate and push people around, and at the end of the day they make their money by stealing other peoples Dinner money.

    Now, borrowing large amounts of Shares to sell short, intimidates the small investors who sell, creating an artificially low price for their Shares.

    After a few months of continually Short selling on a grand scale, the Bully then takes the opportunity to present the Company with an offer it cannot refuse.

    Afterall, all the normal investors have been scared away by the Bullies Short selling actions.

    So, the scared Small Investors in selling at the artificially lowered market price, have been robbed of their Dinner money.

    And the Company itself has been held to ransom in order to stand a chance at some kind of financial stability.

    Some people would call that Business in a Free market.

    I know what I would call it.

    I never did like Bullies, and I for one would not give up my Dinner Money without a fight.

  • Comment number 23.

    i invest in a pension fund which regularly loans out stock in which i also invest independently.
    i regularly find myself facing substantial paper losses on my personal portfolio as a result of shorting raids underpinned by stock i own indirectly in my pension fund.
    surely there is a real conflict of interest here.
    a simple expedient would be if the pension funds and other institutions were required to disclose the stocks they are loaning.
    at least then the playing field would be somewhat more level.

  • Comment number 24.

    in addition this secretive activity drives away genuine investors and surely makes it harder for smaller companies to raise funds when required.
    the market gets a reputation - not undeserved - for dishonesty.

  • Comment number 25.

    A factor that those speculating on the HBOS share price will have taken into account is that by virtue of Halifax's conversion from a building society in 1997 it is the most widely held share in the UK with over two million shareholders. Many of these will be inexperienced investors with no other equity holdings. The effect of short selling will have made many of these investors panic sell (I know some who have) their holding at the bottom of the market as they watch the value of their investment whittle away. Short selling may be legal but to target inexperienced investors many of whom will be pensioners and others with modest means is hardly ethical. To many dealers the ends justifies the means if they get their fat bonus on the back of it.

  • Comment number 26.

    The FSA have not gone far enough.

    Short selling is so open to market manipulation and downright corruption that it should be totally outlawed.

    You have to ask the question, who actually gains from short selling? A handful of greedy law firms and hedge funds.

    Stocks short sold on speculative rather than financial fundamental grounds, may never recover, and this can contribute to unemployment of an innocent workforce and long term misery.

    The pension firms that temporarily loan out the stock and thereby contribute to the market turmoil and wider destabilisation should be brought to book too. There should be a league table of the pension firms most guilty of perpetrating this short term gain for potentially long term pain. People/ companies who entrust their pensions with these companies can then make the decision, on economic or ethical grounds, or both, as to whether they want to keep investing with them.

  • Comment number 27.

    Pardon me for being cynical. Well it's not surprising the big pension funds don't want to do it. Most of them are index trackers so the value we see in our pensions and growth is based on the value of the shares.

    But of course the fees they get for loaning shares don't get put into our pension pots, no, they go into the pockets of said pension fund managers. Of course they don't have to declare these fees. They don't care if the value of the shares go down or not as long as they get these lucrative fees, any losses can be put down to 'market forces'. They make money whether the shares go down or up.

    Robert, do a bit of real journalism and find out the motivations of these people and where they get their rewards.

  • Comment number 28.

    I agree that short positions help keep the market efficient - if there's money to be made by popping over-priced stocks, then that's a good incentive to do so.

    However, for this reason, significant short positions need to be disclosed - as with significant long positions, the profit from manipulating prices is just too tempting for some.

    In fact, cornering the market from a short position is likely to be worse than from a long position - prices can only fall so far, and can cause insolvency if debts are secured against a (now-undervalued) stock as a result.

  • Comment number 29.

    What Robert is suggesting is that market manipulation is taking place - isn't this illegal? If so, I look forward to seeing people prosecuted. If not, shouldn't it be?

    I agre wrt to market transparency and making people aware of large amounts of shares being lent - in the same way as if they were bought.

    I think there are many reasons why people want to borrow shares and as such making the practise illegal may not be the best thing, but making the market aware of it may be a better way of preventing market manipulation.

    I don't like articles which only tell one side of the story - they look poorly researched and thought out.

  • Comment number 30.

    Pension funds (insurance companies) make their cash by charging a monthly fee to policyholders and yes I'm cynical too. Having worked in the pension review in the late 90s I saw examples of the value of an admittedly very modest pension pot reducing to zero as a result of monthly fees and no more contributions from the policyholder. The pension fund manager still gets their cash whether the underlying equities do well or badly. All the risk is on the policyholder.

    I don't know about hedge funds but it just looks to me that if you can make something so complicated that the average person doesn't know anything about it then you can make money out of their ignorance.

  • Comment number 31.

    I am rather dubious about the benefits of pension funds generally, unless the contributions are paid by some affluent large company on your behalf.

    Seems to me that the fees more than make up for the tax benefits and supposedly sound investment strategy. At the end of the day, who do you think pays for all those salaries, bonuses, and nice offices?

    Over 30 years you would do better by simply putting your money in a large investment trust, and your heirs would also benefit from the accumulated capital when you die.

    Short selling is just part of the investment game, and ensures those close to the action make more money than the average punter. It doesn't really affect large profitable companies but ensures that the weak ones go bust quicker. I can't see that banning it really makes any difference in the long term.

  • Comment number 32.

    The FSA is making a very big mistake. Its job is to regulate the market, and to ensure a level playing field for all using it. What it has done yesterday is to intervene on one side of the field only. The market in any stock is a balance between buyers and sellers, with the price set at the margin between the two. There is no free lunch for short sellers. On every position they risk their capital, and are often forced to cover at a loss. By setting different disclosure requirements for longs (3%) and shorts (0.25%), and by suggesting that a short position of more than 0.25% is in itself "market abuse", the FSA is foolishly taking the longs' side - imagine a football referee reducing one team to seven men at the start of a match, and blindfolding the goalkeeper.

    Whether or not the HBOS or any other rights issue fails or is left with the underwriters should be left to those involved in the market. It's none of the regulator's business.

    And, Robert, restricting or banning stock lending will harm those long of stocks just as much, or even more than the shorts, by reducing stock market liquidity and causing the cost of trading to go up dramatically.

    Together with the rushed rescue of Bradford and Bingley two weekends ago, which was apparently brokered by the FSA but during which the existing shareholders were cheated by the abandonment of previous underwriting commitments, the abuse of preemption rights and a free anti-dilution clause for the new shareholder, this intervention is seriously damaging to the London market's reputation for basic competence and fairness.

  • Comment number 33.


    interesting blog! FSA burns hedge funds...what does that mean.

    from what i am reading it, the FSA is going to ban certain hedge funds.


  • Comment number 34.

    The FSA measures are mere political puff.

    When governments run economies to maintain permanent levels of unemployed consumers thereby driving down real standards of living for the majority. There must come a day when the wealth of the few so far outstrips the wealth of the many that p/e ratios become unrealistically high and the only way to generate a decent return is to create and play bubbles and collapses.

    The remedy is obvious. Substantially raise the living standards of the 95% whose work creates the wealth by collapsing asset (including family homes) prices while experiencing hefty wage inflation.
    And surprise surprise, that is what the markets are doing.

    If the govt wants to do something meaningful then change the tax laws to prevent profits created here being accounted as offshore profits. It amounts to a subsidy for business and a cheating of our own taxpayers. Maybe then we could lower tax rates.

  • Comment number 35.

    re #14
    If a pension fund lends out stock then it should be embargoed from trading in that stock until the loan is redeemed. Otherwise, doesn't it have insider information about forthcoming trades?

  • Comment number 36.

    This is a good article on a current hot topic.

    However, I am still unclear as to what value short-selling creates for anyone apart from the short-seller. Direct stock ownership provides capital to the business in question but this seems like nothing more than a tool enabling the transfer of wealth from the majority to the minority.

    The "luddite" in me wonders why we don't stop short selling altogether?

  • Comment number 37.

    I have read all the blogs and have not seen one referring to the possibility that the short seller is one or more of the underwriters who drive the price down by undisclosed short selling, making it unattractive to the genuine shareholders to take up their rights. The underwriters will then be required to take up the unsold shares on the rights issue at the heavily discounted price, after which the short sellers return the borrowed shares showing a very handsome, and very dirty profit in addition to the profit from underwriting. If there is no dirty work afoot I see no reason why the FSA's proposal should be objected to, and plenty of reason to see it on operation.

  • Comment number 38.

    It occurs to me that we in the UK are suffering unduly from short selling because it is becoming more restricted in the US. Enterprises that would in the past have tried their luck in the US are being restricted more and more from doing so (SEC Regulation SHO and all that).

    Also I seem to recall that Christopher Cox (who is I believe Chairman of the SEC) made a speech about the "Naked' Short Selling Anti-Fraud Rule" in March. I am not particularly up to date with US developments since but just perhaps we are suffering because the US is clamping down too! (I wonder why we did not clamp down earlier? As it must have been a risk that the hot money and fevered traders would switch.)

    When all one had was backwardation and fortnightly settlement things were much easier! (Before the big bang).

  • Comment number 39.

    Dear Robert
    First we have the Northern Rock fiasco, then a series of financial disasters like Barclays HBOS, AND NOW AIG, on top of that we have sudden huge rises in fuel costs, and unimaginable damage being done to food prices, hitting the the very heart of this is the FINANCIAL COST, and those who have levied this cost are the Finacial Instiutions, recouping their losses, and they have done it by stealth,They are the ones who through speculators at stock exchanges have burdened the general public with their failures. The next huge failure is the housing market, and it goes all the way back to Northern Rock, and the credit crunch.even extending to Spain and its housing market,So when you analyse the faliures, it is all the money men, that have created the problem, "What is so evident is the fact that ordinary people with a little savay, saw this comming,"!!!! and yet Governments denied that this RECESSION ever existed, so the fault now becomes the fault of Government, and the Fianaciers, who have the Governments in their pay pockest, it is no wonder, they just sat back and let it happen, the fault of this fiasco therefor lies at the heart of the banking system, the BANK OF ENGLAND AND THE TREASURY, AND WE ALL KNOW WHO CREATED THIS MONEY BLOC, ITS THE SAME AS 1929.

  • Comment number 40.

    #36 - Only the initial purchaser of the stock provides capital to the business - after this point, when the stock is bought or sold, it is only the ownership of a share of the business that changes. The entire point of the stock market is to provide a liquid *secondary* market for the equity, so that - when the business *does* need to raise more capital - investors are more likely to take up new issues. In this secondary market, whether you sell shares that you own or that you have borrowed makes very little difference - the motivation is the same, namely that you believe the shares are overvalued.

  • Comment number 41.

    "That's quite shocking. It makes them look short termist and think"

    What nonsense. If anything it is the converse. Short selling will only affect a share price in the short term, ultimately the price will revert back to a value based upon the fundamentals of the business.

    Institutions which are investing for the long term, are happy to lend stock for a fee because they know that in the long term short selling, and temporary fluctuations in price will make no difference.

    I agree that short selling needs to be disclosed to the market (in the same way that a company has to disclose significant shareholding changes). However, no other action is necessary, let alone some sort of ban on stock lending.

    Banks are in the business of lending to make money - it is what they do. Stocks or cash the fundamentals are the same. One could equally argue that Banks are stupid for lending money because it increases the money supply and thus decreases the value of money

  • Comment number 42.

    It is interesting how some try to justify Market Manipulation as liquidity.

    Borrowing huge amounts of Shares to sell short in order to ARTIFICIALLY lower a companys Share price, is not liquidity.

    These actions distort the Market and rather than enabling the proper function of the market, they just create fear and mistrust in Investors.

    Who will buy ANY Shares if they know that potentially their Company can be targetted through HUGE short selling in order to make their Shares worthless ?

    The Hedge Fund Millionaires may feel these practices are great, but the ordinary Investor will never accept that such practices are appropriate.

    In fact People will turn away from Share ownership completely if something isn't done to prevent MASSIVE shortselling by individual Hedge Funds.

    The People who feel it appropriate are clearly worried their own profits and scams may be affected.

  • Comment number 43.

    #42 supercalmdown

    Presumably that is why people invest in hedge funds..

  • Comment number 44.

    #43 prudeboy

    Ah, a two tier Stockmarket with the Insider Traders knowing whose Company will be Short sold next ?

    Or do you mean a Two Tier Stockmarket where a minority of Investors (Hedge Funds) ride rough shod over the investments of all others until, they are the only ones remaining ?

    Either way, with the Market in its current state, no normal Investor should buy any Shares.

    The risk of loss of Capital at the whim of a large Shortseller, far outweighs any possible return.

    After all, who knows which Company will be targetted next?

  • Comment number 45.

    wilkolo @ 41

    Is your last sentence not exactly what we are seeing now in the run-away rises in commodity prices?
    Money is seeing its value decrease because credit was extended inappropriately.

    Lending doesn't have to be stupid but it can be.

    Is there any reason why a process couldn't be put in place for when companies are raising captial through rights issue that includes freezing trading of the shares at a certain point?

  • Comment number 46.

    When I used to work in the City I was responsible for the production of our valuations for pension funds. What I had to do was to indicate against any stocks which were lent that they had been lent and who they had been lent to. There had to be an indication as to how much we had received from the fund which had gone short.
    More importantly, when we got involved with options I had to calculate what the contingent liability actually was in the event of the 'investment' going wrong. This figure usually scared the s*** out of some people and therefore limited the exposure.
    This was in the early nineties but it seems to me that reporting of these types of deals has gone back wards.

  • Comment number 47.

    Prof. Andrew Clare (Cass Business School) tells us that the BofE Interest Rate Committee are akin to the Band of the Titanic.

    That is, they are fully aware of what is coming but are powerless to do anything about it.

    In my humble opinion, those dozy old 'steam-era' Building Societies are looking more attractive as a haven for the people's savings.

    Goodbye, Titanic (HBoS, Barclays, RBS et al).

  • Comment number 48.

    Re 42 What evidence do you have of huge share borrowing to lower a companies' share price artificially? The universe of potential buyers is massively larger than that of potential short sellers - most institutional investors are still required to be long only. Most of the attention seems to have been on HBoS (eg in Mr Peston's orginal blog). Take the data available from CREST (to anyone prepared to pay their fee) on stock lending of HBoS shares. It shows that the amount lent fell from around 10% of market cap in late March to just under 7% last week. That compares to an average of just under 5% for all FTSE 100 companies. Since the rights issue was announced, HBoS lending has been broadly flat. There is no indication of massive short selling feeding through into a pickup in stock borrowing to cover those positions. Rather the evidence suggests that any new short selling was broadly offset by other investors buying the shares in order to close out existing short positions.

  • Comment number 49.

    Hypothetical situation:

    A company has 500 million Shares in issue.

    Normal daily trade, say 8 million shares.

    Someone borrows 5% (25 million shares) and dumps them on the Market.

    Result 33 million Shares looking for a Buyer instead of 8 million.

    Unless the Company has produced some very good News at the time, these extra Shares will force the Share Price right down.

    At one point one of the Banks had 18% of its Shares out on loan (mostly Shorted).

    So, my simplistic example shows how the Market can quite readily be affected by one Player.

    Add a good dose of Economic gloom, a credit crisis and the scenario I have described becomes even easier to accomplish.

    Normal trading volumes fall even lower as the regular Investors are worried by the crisis, so a large (1% or more) Short has an even more disproportionate impact on the Share Price.

    Now, this isn't Insider Trading, as the Shorter isn't using priviledged Information provided by a Company source.

    However, collusion between Shorters could fall within the Insider trading laws if they work as a team to Rig the market.

    You would need a proper Lawyer for that question!

    These are dangerous times to be a small Investor. We are all best out of it, until the Big Boys have finish breaking their Toys.

    We are truly the Minnows swimming with Sharks !

  • Comment number 50.

    #49 supercalmdown

    Minnows and other small fish can protect themselves by forming shoals.

    Perhaps the equivalent of investing in a hedge fund?

    Have "conventional" funds run their course? Could people invest in funds which in turn invest in a plurality of hedge funds? Hedging their bets..

    That is the beauty of the system, always evolving.

  • Comment number 51.

    This minnow is swimming as fast as possible into the shelter of those dozy little Building Societies.

    The great white sharks like Branson can have the banks.

    Great quote from impresario Harvey Goldsmith at the weekend 'I'm only a millionaire {because I have a soft side} ... animals like Richard Branson are billionaires because they are obsessed with money like some disease, being in the top 100 wealthiest people on the planet isn't enough for him .. he has to be number one..'

    I'm not sure even Tom Bowers went this far with Branson ... cheeky chappie my backside.

  • Comment number 52.

    My point was that there is no evidence in the CREST data of anyone borrowing 5% and dumping them on the market recently. The value of borrowed HBoS shares has been more or less constant around 6.5-7.0% since May. (Or, if anyone has done that, it must have been offset by other short sellers closing out positions by buying shares.)

  • Comment number 53.

    I'm going to sound boring and old fashioned.

    But didn't making Finance too complicated cause the Credit Crunch in the first place?

    CDO's, SIV's etc have created an unnecessary layer of complexity, with poor performing assets hiding (or hidden) amongst top quality assets.

    If anything the Market should get back to basics.

    Finance doesn't have to be complicated, Shares, Preference Shares and Debentures helped build the Victorian age.

    They didn't need complex financial instruments.

    Complexity or CONplexity as it were, is the hallmark of dodgy deals through out history!

    Don't just count your change count your fingers too!

    Keep things nice and simple.

  • Comment number 54.

    # 53

    I read a brilliant piece in the NYT last summer which showed that the ratings agencies, by creating a new index, turned low grade junk 'magically' into AAA CDO's.

    Basically, the whole thing was a gigantic con.

    Unfortunately it is us minnows who must pay the price.

    Twas always thus.

  • Comment number 55.

    I'd better make this my last post today, but isn't what has happened to the Stockmarket a symptom of the decline of the Middle Class in Britain?

    The trend in private share ownership is downwards, with fewer individuals directly owning Shares, with the majority of Shares owned by Institutions.

    Those Private individuals who own Shares tend to have a connection to the Firm they own Shares in (ie save as you earn schemes, profit sharing, options etc), often having worked for that firm.

    Those Private individuals with more considerable fortunes are moving offshore, and Investing all or part of their fortunes with Hedge funds.

    Those Investors who are left are under pressure from rising costs of living, and probably are less able to take advantage of Share price crashes (and indeed may be very seriously affected by these events).

    So, to look to the future, a shrinking Middle Class, increasing disparity between the Rich (with managed Hedge Funds) and other Investors, fewer trades will take place in Public, as the Publicly quoted market shrinks.

    More Business deals will happen between Conglomerate Hedge Funds, and Super Investment Funds, in private.

    All this would mean a concentration of economic control and influence into the hands of a few Fund Managers and Management teams.

    Of course, the Middle Class is more likely to be affected by any down turns and the credit crisis affects them the most.

    So, fewer well to do people.

    A bit of a Dystopian future!

    For the Hedge Funds, actually, without a Market to sell their Shares back to, they will have to turn to proper management of their investments to produce results.

    After all if the Middle Class is no longer able or willing to buy Shares they cannot realise their assets by public flotation, (for example Debenhams, a successful public float at £2 I think, not £2 now though)

    Perhaps there will be a much smaller Stock market in future with far fewer PLC's to choose between.

    I hope I'm wrong.

  • Comment number 56.

    Markets are best left to their own devices. The alleged abuses of the system are irrelevant. I am not in favour of regulatory action, the FSA should be abolished. Trying to protect greedy persons that send £100k to a Nigerian drug baron on the strength of an unsolicited email is their problem. Caveat emptor is the only rule applicable and that includes the so called “Hedge Funds” and their huge charges. Does no one remember LTCM? It was only twelve years ago and the same international banks were involved then as today. Human greed is a fact of life, let those so inclined gamble with our monies. It is up to us to not give them the opportunity.

  • Comment number 57.

    Any normal Investor will be wondering whose Company the Shortsellers will target for Destruction next ?

    Just keeping fingers crossed won't help this time.

  • Comment number 58.

    I agree with your comments. Back in March I wrote to Sir Callum McCarthy at FSA on two subjects. One was Mifid which allows trades to be not as transparent on block trades.
    The other important one was"Custodians that are holding stock on behalf of Investment funds tend to lend this at a profit to themselves. The owners of the underlining stock lose money? Even more so clients that have holdings over 3% can have their stock lent but no notice is given to companies or LSE or FSA. The reply was "with regards to shareholders disclosure, little changed on introduction of the Transparency Directive and we belive that our exixting Rules and Transparency rules provide adequote transparency in this space"
    "As a stockbroker with many years experience you will be aware that short selling does have a legitimate role in the markets and that the FSA consulted wideley when we reviewed the UK's short selling regime in 2002.
    Why therefore to some companies have short selling that can account for more than 25% of the total equity.
    If someone loans stock then off the register they should come and announced to the market.People's wealth and long term financial planning is out of the window by the international hedge spiv dealers.

  • Comment number 59.

    Various defenders of the short sellers assume that a short seller is risking losing but in the case I envisaged where the short seller is an underwriter, or an undisclosed associate of an underwriter, they already know that any shares unsubscribed by the genuine shareholders will be sold to the underwriters at a price already determined, so unless they are stupid enough to sell borrowed shares below the rights issue offer price they can not possibly lose on those shares, but only gain.
    In the case of the RBS rights issue the price was around 350 at the time of the rights issue announcement, but the uderwriters would pick up any unsold at a maximum price of 200. This turned out to be something around half a billion poundsworth on the basis that RBS announced that more than 95% of the offer was taken by shareholders , leaving something less than 5% of the 12 billion offer to the underwriters.
    Provided that the short selling was successful in causing some shareholders to "panic" into not taking up their rights, the underwriters could not possibly lose if they secretly sold short at a price substantially above the offer price.

  • Comment number 60.

    Mr Peston,

    It would be interesting to hear your reaction to the detailed counterarguments by David Rule of ISLA. His letter to you, and Jeremy Warner of the Independent, has been published on today's FT Alphaville, at

    See also #10, #48 and #52 above.

  • Comment number 61.

    To David Rule,

    You argue well in the defence of short selling, and you are in my opinion correct. I think you will eventually have to accept that people's desire to scapegoat the short sellers is too strong to be overcome by patient argument. To the unititiated (i.e. the majority of people) it just "feels" wrong when it's explained to them. If you read "Where are the customers' yachts?" written about a decade after the Wall Street Crash, you see how short sellers were then vilified as being somehow responsible.

  • Comment number 62.

    Ploughed my way through your book which was treasure trove of insight into hedge funds but the one thing I could not understand was why anyone would want to ' lend ' shares for other people to speculate with. This latest article helps explain but what are the levels of rent that a lender might receive. Surely, it could not compensate for the damage that could be done to the capital value of their holdings.

  • Comment number 63.

    The hedge funds can short anybody they like and the FSA does nothing.
    Soon as it is a bank that gets hit,it's a case of no you can't do that ...that's us (in a roundabout way if you get my drift)

    Many exchanges arounf the world are party to 'nkaed' shorting where criminals via hedge funds and brokers are stealing billions.
    Most of the regulators turned a blind eye to this.

    I laughed when I saw it happening to a bank,as they are usually complicit in the crime of naked shorting.

  • Comment number 64.

    What about other markets and activities?
    What about assets traded over global markets?
    I read on cnbc today that the US CFTC is taking an interest in setting limits on some oil futures contracts traded in London...
    (although linked to New York contracts)

    This is even though previously they argued that it was simply a market acting as markets do, and some experts still think so

    What is the PROOF of the part speculation plays in prices here (or anywhere)
    Control freaks...

  • Comment number 65.

    Why is short selling a bad thing?

    Obviously if you do it then act in some way to affect the price (e.g. spread a rumour) then it is bad, but that is breaking the rules for both short and long deals.

    In my untrained opinion, short selling is essential and here's why:

    We assume that markets are good at setting prices. This has been shown pretty well. But the stock market is not perfect, and sectors go through herding behaviours which inflate prices to unrealistic levels. When people realise this they panic sell and lose a lot of money, those shares become hard to shift and we lose liquidity, which deflates the price even more.

    Short selling does two things. First it allows people to hedge against how bad the drop will be - i.e. they can cover some of their losses. Second it maintains liquidity of trade and movement of the stocks - someone has to offer the short deal after all and they will end up with the shares if the market falls.

    But whereas long selling depends on an optimistic view that prices will rise, short selling depends on the opposite. For this reason it is seen as "bad form" and "anti-market" - the stock market benefits from a perception that growth is guaranteed after all. The optimistic view may be OK in the very long term, but a realist will use both tools.

    If the FSA needs to clamp down on rule breakers then good. But to stop a legitimate trading practice is not the way to do it. That is like banning cars to stop speeding.

    One more thing - if short selling is bad, then we should start dismantling the derivatives markets (far higher value than stocks) as well, as they are often used in exactly the same ways.

  • Comment number 66.

    The "fraudalent" shorting of HBOS shares drove them to ~450 pence.

    The shares duly recovered after the FSA put out their own "information" that the price had been manipulated.

    Only a month or two later they are ~250 pence.

    Price manipulation does not distort the market. Valuing goods dependent on their price distorts a market.

    If your economic sophistication only extends to valuing a stock or house or commodity based on its price and its price direction, and then scream "shenanigans" when that price starts bumping about, then you deserve to lose all the speculative gains you were so greedily hoping to acquire.

  • Comment number 67.

    The short sellers in the market, whether US, UK or internationally based are not to blame for the fall in HBOS's share price. Sure the short-sellers have compounded the recent free-falls in price but the underlying fundamentals of HBOS are the reason behind the fall: the intrinsic value is much lower than people think.

    Think about this.. HBOS makes money by using consumer savings to fund consumer morgages. Now in this climate we see less morgages and less savings leading to less revenue for HBOS. The rights issue is just the beginning of the spiral downward for HBOS.

    We have seen the price dip below the 275p offer price several times and if we look at the common stockholders we see that most will not want to expend more capital to buy shares at the offer price espcially as price is fluttering below the 275p offer. So where does that leave HBOS? We'll if no one uses their rights then they will probabl sell them.. but to who? Hopefully middle eastern, indian or chinese money will want a piece of an established bank in the UK... or will they esp. after the RBS offer which was much more attractive and the recent Barclays offer! At the end of the day if no one wants HBOS the losers will be the common stockholders and retail clients who tend to be the poorer, older geneneration with their life savings in the bank (similar to northern rock).


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