Today is the second anniversary of the launch of my blog. Stock Lending Today came to life just three days before the SEC brought in a short selling ban on 19 financial stocks and less than a month before the Lehman default occurred. I also launched the Securities Lending Traders Network group on LinkedIn on 19 August 2008. So I guess the timing was pretty fortunate as there has been a lot to write about these past couple of years. The only thing holding me back was time to write the blog, not a lack of material.
We are in a very different world today. While securities lending volumes are still well down from 2007 market peaks, the environment and understanding of the business is changed forever. The political frenzy and media hysteria has largely died down and the questions that remain outstanding are ones that address regulation and reporting – the “what” and “how” rather than “if”. For the first time ever, regulators around the world are in agreement that properly conducted short selling and securities lending play important roles in the capital markets.
The academic studies that examined the impact of the short selling bans that were implemented in many markets have virtually unanimously been shown to have had a negative impact on markets and investors and their future use must surely be in doubt. Regulators will certainly want to reserve the right to introduce bans in the future, but the invocation of such powers must be short term and implemented with very specific and time-based objectives.
Enter the IMF ....
The comments of the IMF staff on the EU Commission Consultation on Short Selling that was issued on August 5th 2010 provides an excellent summary of informed opinion held by many knowledgeable market participants and I recommend it to anyone. I am not 100% in agreement with the responses, but the differences are minor and I don’t want to detract from this document.
Key comments from the IMF Staff I think are worth noting:
- “We agree with the Commission that short selling generally fulfils a valuable role in financial markets and should be possible.” Whew, now that we have that out of the way ...
- “We find no strong evidence that short selling led to falling prices.” Instead, they came to the view that most of the price falls were due to fundamental issues – in other words it was long investors selling overvalued stocks rather than short sellers driving price falls.
- “...while rules regarding short selling are necessary to mitigate the risks, they are only a complement to the overall supervision framework ...” Both long investing and short selling can be subject to speculative momentum and regulators already have powers to penalise abusive behaviour. They should use them if they think there are issues.
- “There is little evidence on the effectiveness of short sales bans.” Amen.
- “There are numerous ways to engage in a short/naked short sale.” The imposition of the bans created an asymmetric environment which harmed investors generally, certain market participants specifically and just shifted activity to different structures.
There is a lot more in the document and I encourage you to read it. It shows just how far things have come since those dark days two years ago and is helping shape the business going forward. I believe we are half way through a five year period of adjustment and the securities lending business will come out looking very different.
Short selling has been with us for hundreds of years, is with us to stay and will undoubtedly play a more important role in the future. In fact, my training company, FinTuition, is launching a one day short selling course on 28 September. The only training I have seen is focused on retail day traders whereas this course is targeted towards institutional investors, fund managers, risk management staff and anyone involved in prime brokerage or securities finance.
I want to say thanks very much to all those people who have taken the time to read my blog, send in suggestions and comments and helped to stimulate the debate and discussion over the past couple of years. I hope to continue to write more posts going forward as I still have a lot to say about the business and the potential changes ahead. Unless of course I am SHORT of time ...
