Stock Lending Today - An Industry Under Siege!

US Short Interest Numbers / Hedge Fund Radio

US Short Interest
Yesterday was the semi-monthly release of data in the US where the short interest figures were reported by both NYSE and NASDAQ.  The data show the figures as of April 15 and both exchanges showed declines as compared to short interest positions at the end of March.  The NASDAQ numbers showed a reduction of 4.8%, with NYSE dropping by 2.9%.
The period coincided with the middle of our 7 week rally, so a reduction in directional shorts shouldn't be a big surprise. Dedicated short funds took a hammering in March at the start of the rally, and the people at Zero Hedge report that quant funds have had a difficult April as well, citing Renaissance as underperforming the S&P by 17% so far in April!
Interestingly, this drop in US shorts contrasts with the European Large and Mid-Cap borrowing information shown by DataExplorers in their research update from last week.   Their figures show an increase n Europe.  However, the data is not directly comparable, and may be skewed by European seasonal borrowing factors.

Hedge Fund Radio
I was first made aware of the N@ked Short Club by a hedge fund manager in February and have been a fan of Dr Stu ever since.  It's informative, fun and funny.  I am privileged to be one of Dr Stu's guests on Monday night at 9 pm London time.  A very impressive list of guests and I am humbled to be in their presence.  Yes, that is correct, even my acute spider-sense of self-importance is tingling and I am the junior partner.  Still, in my quest to cover all media, radio was clearly the gap.  It's also nice to bridge old media (conventional radio) and new media (radio via the Internet).  Dr Stu has agreed to let me pass on this invitation to you:

"You are cordially invited (next Monday, April 27th) to the next edition of the N@ked Short Club - between 21.00 and 22.00 hrs., London Time.

Dr Stu hosts the Naked Short Club on not-for-profit radio station Resonance FM:  1 hour of loose talk about hedge funds and the state of the world, heady music, poetry ... nothing to do with anyone's day job, no promotional agenda, no commercial intent ... just a bit of light relief in these interesting times.

Dr Stu will be on hand with a team of cognitive behavioural finance therapy experts to help callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) to get in touch with their Inner Arbitrageur ... and will be joined by several special industry guests ...

You can listen to the show within London on 104.4 FM.

You can also access it worldwide via resonancefm.com "

I hope you listen and enjoy. 

World Federation of Exchanges - IOMA/IOCA Annual Conference

i am just back from covering the World Federation of Exchanges IOMA/IOCA Annual Conference in Frankfurt.  I was there for Global Custodian Magazine, and this was the first year that the press were allowed to attend. 

For those of you who don't know, the WFE is an association of 51 regulated exchanges from around the world.  IOMA is the International Options Market Association and is a sub-group of WFE that focuses on the derivative markets within the membership.  It was a fascinating event with some very senior people at the conference. You will be able to read about the event more when I put the articles together for GC Magazine.

Why did I go?  The session that captured my interest last week was a session on "Reworking the Principles behind Short-selling". Now you know why I wanted to go, and in addition there was a session on Lehman.  I have mentioned the WFE before, because one of their top three priorities for 2009 is:

"... to help the International Organization of Securities Commissions (IOSCO) set best practices for short selling and securities lending."

The good news is that these words are more than just a trite statement.  I was fortunate to have the opportunity to interview Mr William Brodsky, WFE Chairman and Mr Thomas Krantz, Secretary General of WFE.  I can tell you one thing for certain, these people recognise the fundamental importance of short selling in the marketplace and are doing everything they can to help regulators create sustainable, sensbile rules regarding short selling and securities lending. 

Watch this space and GC Mag for more in the future on WFE.

London Marathon Update

It's only a few days until the London Marathon takes place, and it looks like they will have some greeat weather (maybe even too hot!).  On the right sidebar you can go directly to the sponsorship sites for Bill Foley of JP Morgan and Charlotte Wall from DataExplorers.  "Step up" and support these people and others running the marathon.  Good luck Bill, Charlotte and the others that have contacted me privately and don't want to have their names listed!

Pairs trading

Pairs Trading - an excellent example.

First let me tell you that I am in Frankfurt at the moment covering the World Federation of Exchanges event - the IOMA/IOCA Annual Conference for Global Custodian. There are a number of very interesting sessions that I am really looking forward to hearing. You will be able to read more in future posts and in an article or two for Global Custodian.

However, my laptop has chosen this rather unfortunate time to stop working. As a result I am "moblogging" this post. Mobile blogging means that I am writing this by email, so I don't know how it is going to turn out or appear on the page. Apologies if it ends up looking unprofessional. On the other hand, if it works out, then that was my plan all the way along.

I am often asked about more of the basics behind trading and securities lending. When I came across the following article on Seeking Alpha, I thought it would be a great item to share with you. Real stocks in a real trade are a better way to show a trade than a theoretical example I can give you.

In the example, the writer has given an example of two stocks that are in the same sector and he has gone long one stock and short the other. He refers to another similar trade where both stocks have risen, but his long position has risen more than his short. He has made more money on the long than the short and has been protected against external factors that would in theory apply to both stocks equally.

You can read the article at the following address: http://tinyurl.com/c7kvtq

I hope you find it useful and that the mobile blog works out! Sent from my BlackBerry® wireless device

Don't get too excited!

Happy Days Ahead!?!?
Another good week on the markets – is this a sustainable upturn or a bear rally?  There are lots of people opining on that so I am not certain I can add anything here.  But it is part of an overall scene and maybe I can help set the stage.

•    Six weeks of up markets
•    Some bank quarterly results are showing strong numbers
•    March Hedge Fund performance was also good news. 
•    Hedge Fund redemptions have reduced for the fourth month in a row

However, you may recall from my post in February that Prime Brokers, along with just about everyone else in the financial services industry are suffering from a reduction in resources of all types.  This includes everything from a limitation of leverage available to funds through to staff on the trading desk that cover their hedgie clients.   So obviously what they try to do is focus on the funds that make the money or have the best potential to do so in the future.

At the same time as resources are being cut, PB’s costs have risen and they have typically passed them on to their clients.  Stock loan fees have increased.  Internal funding rates at PBs are up across the board.  Banks do everything they can to avoid giving cash as collateral, yet at the same time, many lenders are more desperate for dollars then ever.  Further, lenders have tightened their list of securities collateral acceptability, making it more expensive to borrow securities.  An old hedge fund client of mine recently asked me about the good old days when convertible bonds were good collateral.  Now you can see them piled up in the corner gathering dust.  Well, not really, but you get the idea.

So for the majority of end borrowers, stock borrowing fees (along with other PB charges) have increased over the past year to eighteen months. 

Floating in the background are also the twin spectres of increased regulation and short-selling restrictions.  It is unclear at this time the extent to which either ghost will morph into a fire breathing dragon that limits funds’ ability to trade profitably.  What is clear is that whatever happens, it will cost hedge funds money.

But all of that is OK right?  Hedge funds make loads of money, so what are a few incidental extra costs between friends?  Despite the fact that hedge funds have continued to beat the overall markets, their figures aren’t sufficient for most to be earning the share of performance fees.  So we are in a difficult spot at the moment because in a Supply/Demand business, the Demand is driving the profitability of the market.  Anything that makes it harder for the Demand to prosper has an impact on the Supply side.  Costs are going up across the board for everyone involved and my feeling is that this will have a dampening affect on the good news we see in the markets.

Saturday Laughs

However, enough bad news … Time for a bit of humour

In my newsletter I was asking for people’s comments on “Lessons learned from the Lehman default”.  One reader who wanted to remain anonymous sent this in.  Thanks for sending it in Alfonso.

6 Lessons about Lehman

• Don’t p*ss off The Man – you will lose
• If you are an 800 pound gorilla running around wall street, chances are that someone will lock you up in a cage eventually
• If you are driving down Wall Street and find yourself heading towards Sh*t Street, when someone offers you a lift in the opposite direction it’s generally a good idea to take it, and not hold out for “something better” to come along.
• If you used to captain an airliner and are used to high altitudes then you should already know :

• It’s a long way down
• Nothing but hot air is keeping you where you are
• You may think you are flying the plane, but the guy in the control tower has your balls in his hands

• If your name is Dick, try not to act like one – it makes for great headlines at your expense
• Always remember there are a lot of people who work for you in countries where gun ownership is still legal

Wall Street Meltdownv Redux

Also, if you want to get a better understanding of the financial crisis timeline, watch this video.

SEC Proposes Five Short Selling Restriction Options

The SEC this week held a meeting to address the emotion-packed subject of whether short selling should be controlled or restricted.  They came up with five different alternatives and you can read the Press Release here.  There is a 60 day consultation period where people can contribute their views.  I'll revisit this subject in coming days, but for now, I'd like your views on which approach makes the most sense. 

So, give me your thoughts! 

P.S.  I am writing another article for Global Custodian Magazine.  I am interested in your thoughts on lessons learned for the securities lending industry as a result of the Lehman default.  Please email me your comments at roy@stocklendingtoday.com .  Don't be shy - there won't be any names in the article!  Thanks for your help.