LONDON (Reuters) - If regulators think they can stop all betting against financial stocks by banning short selling, they might want to think again.
Following the emergency bans, investors have found myriad ways to bet on a falling market -- whether it’s shorting proxies for the financial sector, shorting bonds, or buying index options.
“The way of the capital market has always been to innovate. This is dangerous ground ... but people will try and find a way to make the market tilt a little more in their favour,” said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London.
Stock market regulators across the world, led by Britain and the United States, have introduced curbs on short-sellers, who borrow shares and sell them in the hope of buying them back at a lower price to make a profit.
The restrictions, which mainly apply to financial companies or those with financial arms, are part of regulatory attempts to calm panicky markets.
It didn’t take long for alternatives to surface.
“Investors are realizing that the easiest way is to sell the proxy plays that have exposure to the financial sector,” said Darren Sinden, sales trader at Lite Financial in London.
“Another route is to sell the investment trusts that have large holdings in banks, and hope that the discount to asset value will widen, though liquidity is an issue.”
STILL POSSIBLE In the United States, some hedge funds are closing out existing short positions in financial stocks and using equity derivatives to replace them, according to bankers.
“The SEC has not banned (all) trading in derivatives in these stocks, so it’s still possible for people to take short positions,” said James Angel, associate professor of finance at the McDonough School of Business at Georgetown University in Washington.
The SEC has banned anyone other than market-makers from opening new short positions using derivatives, but this is hard to police, market participants said.
That is because these trades can be done in the unregulated over-the-counter market.
Banks are required under the SEC ban to make sure that any transaction they complete with a customer does not increase the customer’s net short position -- but there is no hard and fast rule for how the bank should ascertain this.
“The SEC has what I call a ‘don’t ask, don’t tell’ policy... however, most market makers don’t ask,” said Angel.
BUYING PROTECTION
Another way around the short-selling bans is to take out bank credit default swaps (CDS) -- the cost of insuring against debt default. If you expect a company to suffer, you could buy protection against it defaulting in the CDS market. Investors stand to gain if spreads widen for any reason.
“Then perhaps also there might be certain contracts that you can run based upon how Euribor or also sterling Libor are performing if you are not comfortable with how the banking structure is overall,” Pope added. “You might be able to take some over-exposure upon where Libor will go.”
Key interbank Euribor lending rates hit a fresh set of highs on Thursday on money market anxiety about whether lawmakers will pass a $700 billion plan to bail out the U.S. banking industry.
Other methods around the bans include buying put options on indexes – or betting that a whole index will be dragged down by financial stocks.
This is less effective than in the past because the weight of financial stocks in indexes has diminished. Data from derivatives exchange Liffe, owned by NYSE Euronext, also shows that puts on index options have, on average, decreased since the short-selling ban.
REAL BEST
Then there are straight bets.
BetsForTraders.com, a website that offers fixed odds financial betting, says it has seen a surge in the number of bets placed against banking stocks following the bans, with the more popular stocks being Royal Bank of Scotland, Lloyds TSB, Barclays, Goldman Sachs, Citigroup and Morgan Stanley.
“We get a lot of people in the City, and see several email addresses from investment banks. There’s lots of business from Asia and continental Europe,” said Ryan Kneale, market analyst at the 18-month-old website, adding that its biggest accounts ran into “six figures.”
Spread betters, regulated by Britain’s Financial Services Authority, said they were not offering shorting opportunities on financials.
Finding companies whose shares rise and fall with the financial sector is a popular alternative to shorting.
“We’ve been shorting Thomson Reuters, for example, and Man Group has also been heavily sold,” Lite’s Sinden said.
Thomson Reuters’ Markets division provides news and information to the financial sector. Man Group is a hedge fund manager whose shares have lost 18 percent this week.
A source close to Man Group said it had asked the FSA for coverage under the ban. Thomson Reuters declined to comment.
Investors are looking for even less direct ways of reducing exposure to financials.
“The other possibilities are selling (staffing and recruitment) groups like Michael Page, Hays and Adecco, or looking for companies that were service providers to Lehman and Merrill,” Sinden said.
1 comment:
What Short Sale Ban? Where There is a Will..
25 September 2008
By Sitaraman Shankar and Dominic Lau - Analysis
LONDON (Reuters) - If regulators think they can stop all betting against financial stocks by banning short selling, they might want to think again.
Following the emergency bans, investors have found myriad ways to bet on a falling market -- whether it’s shorting proxies for the financial sector, shorting bonds, or buying index options.
“The way of the capital market has always been to innovate. This is dangerous ground ... but people will try and find a way to make the market tilt a little more in their favour,” said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London.
Stock market regulators across the world, led by Britain and the United States, have introduced curbs on short-sellers, who borrow shares and sell them in the hope of buying them back at a lower price to make a profit.
The restrictions, which mainly apply to financial companies or those with financial arms, are part of regulatory attempts to calm panicky markets.
It didn’t take long for alternatives to surface.
“Investors are realizing that the easiest way is to sell the proxy plays that have exposure to the financial sector,” said Darren Sinden, sales trader at Lite Financial in London.
“Another route is to sell the investment trusts that have large holdings in banks, and hope that the discount to asset value will widen, though liquidity is an issue.”
STILL POSSIBLE
In the United States, some hedge funds are closing out existing short positions in financial stocks and using equity derivatives to replace them, according to bankers.
“The SEC has not banned (all) trading in derivatives in these stocks, so it’s still possible for people to take short positions,” said James Angel, associate professor of finance at the McDonough School of Business at Georgetown University in Washington.
The SEC has banned anyone other than market-makers from opening new short positions using derivatives, but this is hard to police, market participants said.
That is because these trades can be done in the unregulated over-the-counter market.
Banks are required under the SEC ban to make sure that any transaction they complete with a customer does not increase the customer’s net short position -- but there is no hard and fast rule for how the bank should ascertain this.
“The SEC has what I call a ‘don’t ask, don’t tell’ policy... however, most market makers don’t ask,” said Angel.
BUYING PROTECTION
Another way around the short-selling bans is to take out bank credit default swaps (CDS) -- the cost of insuring against debt default. If you expect a company to suffer, you could buy protection against it defaulting in the CDS market. Investors stand to gain if spreads widen for any reason.
“Then perhaps also there might be certain contracts that you can run based upon how Euribor or also sterling Libor are performing if you are not comfortable with how the banking structure is overall,” Pope added. “You might be able to take some over-exposure upon where Libor will go.”
Key interbank Euribor lending rates hit a fresh set of highs on Thursday on money market anxiety about whether lawmakers will pass a $700 billion plan to bail out the U.S. banking industry.
Other methods around the bans include buying put options on indexes – or betting that a whole index will be dragged down by financial stocks.
This is less effective than in the past because the weight of financial stocks in indexes has diminished. Data from derivatives exchange Liffe, owned by NYSE Euronext, also shows that puts on index options have, on average, decreased since the short-selling ban.
REAL BEST
Then there are straight bets.
BetsForTraders.com, a website that offers fixed odds financial betting, says it has seen a surge in the number of bets placed against banking stocks following the bans, with the more popular stocks being Royal Bank of Scotland, Lloyds TSB, Barclays, Goldman Sachs, Citigroup and Morgan Stanley.
“We get a lot of people in the City, and see several email addresses from investment banks. There’s lots of business from Asia and continental Europe,” said Ryan Kneale, market analyst at the 18-month-old website, adding that its biggest accounts ran into “six figures.”
Spread betters, regulated by Britain’s Financial Services Authority, said they were not offering shorting opportunities on financials.
Finding companies whose shares rise and fall with the financial sector is a popular alternative to shorting.
“We’ve been shorting Thomson Reuters, for example, and Man Group has also been heavily sold,” Lite’s Sinden said.
Thomson Reuters’ Markets division provides news and information to the financial sector. Man Group is a hedge fund manager whose shares have lost 18 percent this week.
A source close to Man Group said it had asked the FSA for coverage under the ban. Thomson Reuters declined to comment.
Investors are looking for even less direct ways of reducing exposure to financials.
“The other possibilities are selling (staffing and recruitment) groups like Michael Page, Hays and Adecco, or looking for companies that were service providers to Lehman and Merrill,” Sinden said.
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