I was sitting here at 1.15 am reading the latest barrage of stories about short selling and securities lending. It reminded me that I have been writing this blog for over three years now and my inspiration for starting it was the uninformed and negative press that these two activities had been receiving at the time. I wanted my blog to contribute to the debate and redress some of the balance.
It is certain that a much wider community has become aware of both practices since the summer of 2008 and the number of news items reflects this, having absolutely skyrocketed. Much of the debate is informed and while I don't always agree with the judgements made, at least there is a discussion. Regulators have had to come to grips with the challenging issues around these complex and usually opaque market practices, and they have had to do so in times of unprecedented turmoil.
Witness the comments from the Dutch Finance Minister Jan Kees de Jager who stated he is not particularly worried about the recent market ructions and sees short selling as having a useful place in the market. Further, he believes that the short selling bans implemented, and recently extended by France, Italy, Belgium and Spain will have little lasting effect. The chart below shows the performance of four European banks courtesy of Yahoo Finance. Can you tell which two banks are being "protected" by the short selling bans and which two aren't? I argued in the FT.com and elsewhere in readers' comments that the price falls had little to do with short sellers and that the short selling ban would not arrest price falls just as they didn't in 2008-2009. Correct so far.
While on the one hand the Dutch give me hope, I also read about a "study" from SCM Private. Several articles quote SCM as suggesting that some investors are risking 100% of their assets by lending their securities. Given that there are standard agreements that are proven in court, and that the business is virtually always over-collateralised in favour of the lender and marked to market and collateral-settled on a daily basis, it is at best misleading to suggest such a thing. I haven't read the study yet, so perhaps this is out of context or it has been misquoted, but that type of alarmist approach begs to be dismissed. It doesn't contribute to the discussion and to the extent that the document might have usfeul commentary, it is less likely to come out.
So where are we now? Despite the ill-considered actions of those four countries noted above, regulators and markets elsewhere have held their nerve, and it must not be easy. Surely better to appease the public and the politicians? Yet the majority remain committed to open markets and not repeating the mistakes of the earlier short selling bans.
That in itself deserves applause and gives me comfort that regardless of these difficult markets, we are operating in a distinctly different place than we were. Well done. I can go to sleep now - I don't have to be at Heathrow until 5.30.