I’ve mentioned before the dramatic leveling of the playing field in prime brokerage. New entrants, new alliances and product combinations are all having an impact or may do so in the coming months. Looking at the same issue from a different angle we can see increasing influence from a geographic perspective. Canadian banks seem to have weathered the financial market turmoil better than banks in most countries. Comments on these banks inevitably include positive endorsements on balance sheet, capital strength and counterparty strength. I like to think that RBC and CIBC were both put into stronger positions as a result of my combined 7 years working for them in the 1980's.
The news last week that Bank of Montreal (BMO) had purchased Paloma Securities is just the latest example of the increasing footprint of the Canadian banks in the securities finance business. This past year saw the six Canadian banks’ prime brokerage businesses all receive an increasing number of responses in the Global Custodian Prime Brokerage Survey. Some are newer entrants to prime brokerage or at the smaller end (think National Bank and CIBC) whereas RBC, Scotia and TD have been part of the business for a longer period of time. BMO’s purchase will undoubtedly help improve some of their weaker scores in the securities lending space and aid their effort in growing the PB business.
CIBC Mellon and RBC Dexia are both long established global custodian banks, although both represent evolutionary developments from predecessor businesses. A few months ago, Scotiabank dove into the Wachovia organisation and scooped up six senior executives to help it create an agency lending product. In the repo space, TD has been a new entrant into the space in New York this year, filling an obvious gap in their product range.Compare the Canadian experience with the latest corporate news from Australia in the securities space. Yesterday ANZ announced the sale of its custody business to JP Morgan. This follows a horrific period in ANZ’s recent corporate history with their experience in securities lending with the Opes Prime debacle. They obviously decided it was best to cut its exposure to securities services and focus instead on its recent purchase of ING’s Australian wealth management and insurance business.
Australia remains one of the less hospitable places for short selling and securities lending. One of the key requirements placed on traders is that short sales must be disclosed when the order is placed and the exchange releases daily statistics on short sales. I always wonder what this type of information is meant to convey. I maintain that information without context is meaningless. Lets look at the Aussie data by clicking here for an example. This report is from trading on November 19th and shows 313 stocks where some short selling was reported. The report is a text file rather than a spreadsheet, so I have manually tabulated some figures and I admit there may be a certain degree of error which is mine alone.Of the 313 stocks, 59 of them reported short sales of 20% or more of total turnover. Thirteen of the stocks had short sale turnover in excess of 40%. Of the 13 stocks where short sales were over 40%, 3 of the stocks had price increases on the day, one was essentially flat, 8 stocks fell between 0 and 2% on the day, and only one moved more than 2%, with a dramatic 6.89% drop. Cumulative short sale positions are also shown, and despite this high daily activity which is pretty consistent, the largest aggregated position represented only 0.37% of issued share capital. Effectively this is a negligible.
So what do the numbers tell us? Truth is, I don’t really know. Is the short selling volume primarily intraday trading that is covered by the end of day? Are the trading volumes low in my sample, thus showing short sale activity as disproportionately large? Are the stocks and the report from the day not representative of the market as a whole? I don’t really know the answers and I think it is likely that there are a large number of investors in Australian stocks that would also struggle to respond to those questions. Rules meant to protect investors that can’t actually be used by them represent unnecessary regulatory interference.
