Stock Lending Today - An Industry Under Siege!

Shuffling Securities Services Players Continues

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. 

International Securities Exchange Leads Investment Round in Quadriserv

Things continue to "hot up" in the electronic securities lending space as evidenced by this latest round of fund raising in Quadriserv.  You can read the story here. 

No time for analysis this morning as I am heading out to conduct another securities lending workshop session.  Two other bits of other news for you:

FT.com:  HSBC shares plunge to 13 year low amid short selling

Reuters:  SEC looks at short selling measures

Oh yeah, I almost forgot ... Alan Kohler slammed securities lending in yesterday's Business Spectator in Australia.  As I mentioned yesterday, I added a comment because the last line of his article was: 

"Let's have that debate"

They still haven't printed my comment.  Debate, what debate?

Short selling from Australia to America

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The short interest data for the NYSE and NASDAQ was published last night for short positions as at the end of February.  Overall short interest was up by 3.1% on the NYSE, showing a short interest of 3.83% as compared to 3.61% at mid-February.  NASDAQ numbers showed a 2.1% increase in the two week period.

This tied in neatly with comments from Barney Frank who told reporters that the SEC was planning on reimposing the "uptick" rule in the US.  The uptick rule requires that a stock cannot be sold short unless the most recent trade was higher than the preceding one.  The idea is that the uptick stops a wave of continuously negative trades being executed, acting to slow down short sales being executed.  The fact that it is being looked at should hardly surprise investors or trades as Mary Schapiro, SEC Chairman made a commitment to re-examine the uptick at her confirmation hearings. 

Two things I don't understand follow.  I know, any of you will say there are a lot of things I don't understand, but stay focused please.  If the removal of the uptick has allowed shorts to trade unfettered and as a result exposed us to the turmoil we are in , then why aren't the short interest figures higher?  The entire US (and world) markets are down, so how can such a small percentage of shorts be the driver.  And if the uptick rule stopped half of all the shorts, would we have avoided the horrific markets we've seen?  The second item is that I don't recall Tech stocks being saved when that bubble burst even though the uptick rule was in place.  I obviously don't get it, so please explain.

Normally it's the short sellers that get the grief, but the latest comments from Australia questions the value of securities lending itself.  Alan Kohler, commenting in the Business Spectator raised the following:

"The question is whether artificially increasing the supply of listed securities through stock lending is necessary for the better functioning of the securities market and the economy.

Let’s have that debate."

I can never resist these things, so I added a comment.  Let's see if he really is interested in a debate.  As of writing this post, they still haven't published my words.  I will however, give them the benefit of the doubt due to the time difference.  I'll keep you posted. 

No posts for a couple of days as I am off to Paris, spreading the Stock Loan Love!

Marching forward: Collapse, Resolution and Charity

March 2008… It was really at that point that it became clear that the markets wouldn’t be able to continue to ignore the problems that first became evident with the sub-prime problems from the summer of 2007.   Hedge funds went into 2008 leveraged and the seeds were sown for the worst year on record for hedgies. 

Take a look at the chart on the left showing the MSCI World Index from March 6 2007 until yesterday.  Not pretty, but you can see why short bias hedgies have done well.  The chart is from the MSCI Barra website.  If you click on it, you will get a larger pop-up.
 
Two big events occurred in March that set the tone for the year and had an impact on securities lending.

First, this coming week marks the one year anniversary since the bailout of Bear Stearns.  William Cohan has just released “House of Cards” a book which chronicles the demise of the mighty Bear.   You can read a book review from the LA Times here.  The review praises the book very highly and it is definitely on my Wish List! Also, the author has written an article on CNN about where key Bear employees are today.  You can read that article here.

Second, Opes Prime, a Melbourne based stockbroker collapsed.  Opes was inextricably linked to the securities lending business in Australia and served to undermine confidence in our business from a domestic Australian perspective which remains today.

A year down the road and it seems that some progress is finally being made towards resolution.  Opes’ financing banks, ANZ and Merrill Lynch have agreed a deal with the company’s liquidators offering investors 40 cents on the dollar approximately $253 million AUD.  The offer still requires approval from a majority of creditors with claims to at least 75 per cent of the total payout.

Charity begins at home … or at least on my website.  Take a look at the right sidebar on the site where you will see the lovely and talented Bill Foley’s name listed.  He is running the London Marathon in a little while and you can click on the box below his name to sponsor Bill.  I am also will to post up other people’s charity fundraising links on this site.  The only proviso is that you are a bona fide member of the Securities Lending Traders Network on LinkedIn or the XING Securities Lending group.  You can connect into both groups on the left sidebar and apply.  If you are approved for membership (it’s free, but you must be connected to this business in some way) and you are trying to raise money for a legitimate charity, drop me a note.  Please note:  I am not in any way endorsing any of these charities, nor validating or confirming that money is being raised for charity.  I am a humble facilitator and people are responsible for checking it out themselves before committing funds.

Securities Lending and Short Selling Round Up

I have a few things that I have picked up over the past week.

Prefer to Hedge Citigroup

Citigroup common shares remain one of the most shorted stocks in the US as measured by number of shares.  It still doesn’t represent a large number relative to its daily turnover, but that is an argument for another day.  In any case, it seems that one of the drivers of shorting this stock is an arbitrage play between the preferred shares and the common shares.  Investors and traders were shorting the common stocks as a hedge to their buying of preferred.  Citi has announced that it will stop paying dividends on virtually all preferred shares and that it would offer to exchange preferreds to common at a price of $3.25.  That represents a huge premium over the stock that fell off the cliff on Friday.

Citi also said that the redemption price for the preferreds would be at a “premium to market”.  So you could have bought the preferred and hoped to capture some the premium.  However, since your newly acquired preferred shares are still at risk to market price fluctuations, ideally you would want to short the common stock as a hedge.

So, it’s not all negative directional views on Citi, although that is probably the biggest driver.

http://money.cnn.com/news/newsfeeds/articles/djf500/200902271734DOWJONESDJONLINE000964_FORTUNE5.htm

Banned or Not Banned?

I’m a bit confused by a story I picked up from Down Under.  Macquarie Bank shares have taken a bit of a pasting recently, dropping to levels not seen for 10 years.  I’m not going to give any commentary on whether this is a good bank or a bad bank, because I’m not really qualified.  However it seems to me that any bank that is making a profit these days must be doing something right (or avoiding doing other things wrong).

The thing that grabbed my interest was in the article from The Australian highlighted “the basic flaws in the ASIC ban on short selling”.  It seems that short sellers are “finding myriad ways around the ban” including derivative trades.  Shock!  Horror!  Who would ever have thought of finding other ways to get short exposure that didn't involve selling borrowed stock?

Unsubstantiated Rumour of the Day

CNN carried a story that suggests that Bank of America will soon be having a fire sale of Merrill Lynch assets, including the Prime Brokerage business.  Note that in the header I cleverly used the word “unsubstantiated” because I have absolutely no idea whether or not this is true.   I did think it was odd that BoA originally bought Merrill last year having wanted to exit investment banking generally and had not too much earlier in 2008 sold BoA’s own prime brokerage business to BNP Paribas.

Brown Bashing

I can’t help it … for those of you still reading this rather long blog, check out the Open Letter from Steven Katirai to Gordon Brown demanding the PM’s resignation.  It has been doing the rounds recently and I feel it is my duty to pass it on to you.  Download Gordon_Brown(2)   Enjoy, I know I did.