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Tuesday 17 November 2009
Short-selling: what exactly should be disclosed?
Some 13 months ago, just after Lehman Brothers went bust and stocks all over the world were crashing, many fingers of blame were pointed in the direction of short-sellers - particularly those of a naked persuasion.
Some 13 months ago, just after Lehman Brothers went bust and stocks all over the world were crashing, many fingers of blame were pointed in the direction of short-sellers - particularly those of a naked persuasion.
Such sellers were those who had no shares in their possession but sold anyway, as opposed to ‘covered’ short sellers who borrowed scrip to cover their sales.
In the world of high finance, it’s OK to short if you’re covered, but going naked is generally frowned upon because too much of it is seen as threatening the settlements system and destabilising the whole market.
This means that the preferred regulatory approach which has evolved since then is to either ban outright naked shorting or at least to make it very expensive - the former being the case in Hong Kong while the latter is the case in Singapore.
This is then augmented by enhanced disclosure in the case of covered shorts, the thinking being that as long as you tell the world how much is short, then it’s up to the world to make use of that information as it sees fit.
This much is fine; however, the difficulty lies in deciding what exactly should be disclosed. For example, should only short-selling positions be highlighted, or all scrip lending? The contrasting Australian and Hong Kong methods offer some useful insights.
Last week, the Australian Securities Exchange (ASX) started publishing details of securities lending for individual stocks on its website for the first time, the aim being ‘to improve understanding of the settlement risks arising from this form of activity, thereby improving the overall functioning and stability of the market’.
Interestingly, ASX took pains to highlight that outstanding loan positions in a stock do not automatically equate to the total short positions in that stock, since scrip could be borrowed not just for short-selling but also for arbitrage, hedging and ‘fails-driven borrowing’ which is borrowing to meet failed delivery obligations.
Moreover, a borrower could well on-lend the shares to someone else, which would then make the outstanding loan position an even more inaccurate proxy for outstanding shorts.
From the point of view of most readers the usefulness of the latest move is that it gives some idea of what shares are, on any given day, in demand by borrowers though not necessarily for shorting.
Interestingly, ASX’s approach is to publish borrowing by transaction volume, or the proportion of transactions that are loan-related, which probably gives a better picture of borrowing demand rather than quantity of shares borrowed. So if a counter’s turnover on a particular day was the result of 100 transactions and if five of those transactions were loan-related, then the relevant lending percentage that is disclosed would be 5 per cent.
Hong Kong’s approach is slightly different and more targeted. Like Australia, naked shorting is not allowed though like on the ASX, there are exceptions - market makers for example, are allowed to indulge in naked shorting as part of the service they provide.
As for covered shorting, the exchange designates which stocks can be lent and thus shorted. The list of designated stocks is reviewed every quarter and currently has 445 names.
Brokers who decide to borrow stock to go short have to indicate that the trade is a short and cannot sell below the best current ‘ask’ or selling price.
The exchange then collates this data and publishes a ‘Short Sell Turnover’ report on its website at lunch time and after the closing bell which shows for each stock the number of shares shorted and the dollar value of short sales (the information appears under the icon ‘Trading Information’).
Clearly, there is no ‘one-size-fits all’ solution to dealing with short-selling and the related disclosure issues. So which is best for the local market?
The Singapore Exchange (SGX) has yet to implement its measures but going by the proposals in its consultation paper about 12 months ago, it is leaning towards the Hong Kong model.
In November 2008, it proposed that all brokers and customers who have gone short on securities (including warrants and exchange-traded funds) have to mark those orders to indicate them as short-sales.
It also proposed to publish the total number of short-selling orders transacted for individual counters every day.
These proposals were complemented by hefty fines to deter naked shorting which although controversial and unpopular with brokers, have undoubtedly been effective in ensuring smooth daily settlement and thus minimum disruptions.
Still, despite its preference for adopting a Hong Kong-type model, it might be worth SGX’s while to study the ASX’s disclosures that were introduced last week since they too were formulated in response to public outcry in the wake of the Lehman crash.
Perhaps a combination of the two approaches might be possible, that is, provide investors with an idea of how much scrip lending there is for each stock as well as the proportion which are for short sales.
2 comments:
Short-selling: what exactly should be disclosed?
By R SIVANITHY
13 November 2009
Some 13 months ago, just after Lehman Brothers went bust and stocks all over the world were crashing, many fingers of blame were pointed in the direction of short-sellers - particularly those of a naked persuasion.
Such sellers were those who had no shares in their possession but sold anyway, as opposed to ‘covered’ short sellers who borrowed scrip to cover their sales.
In the world of high finance, it’s OK to short if you’re covered, but going naked is generally frowned upon because too much of it is seen as threatening the settlements system and destabilising the whole market.
This means that the preferred regulatory approach which has evolved since then is to either ban outright naked shorting or at least to make it very expensive - the former being the case in Hong Kong while the latter is the case in Singapore.
This is then augmented by enhanced disclosure in the case of covered shorts, the thinking being that as long as you tell the world how much is short, then it’s up to the world to make use of that information as it sees fit.
This much is fine; however, the difficulty lies in deciding what exactly should be disclosed. For example, should only short-selling positions be highlighted, or all scrip lending? The contrasting Australian and Hong Kong methods offer some useful insights.
Last week, the Australian Securities Exchange (ASX) started publishing details of securities lending for individual stocks on its website for the first time, the aim being ‘to improve understanding of the settlement risks arising from this form of activity, thereby improving the overall functioning and stability of the market’.
Interestingly, ASX took pains to highlight that outstanding loan positions in a stock do not automatically equate to the total short positions in that stock, since scrip could be borrowed not just for short-selling but also for arbitrage, hedging and ‘fails-driven borrowing’ which is borrowing to meet failed delivery obligations.
Moreover, a borrower could well on-lend the shares to someone else, which would then make the outstanding loan position an even more inaccurate proxy for outstanding shorts.
From the point of view of most readers the usefulness of the latest move is that it gives some idea of what shares are, on any given day, in demand by borrowers though not necessarily for shorting.
Interestingly, ASX’s approach is to publish borrowing by transaction volume, or the proportion of transactions that are loan-related, which probably gives a better picture of borrowing demand rather than quantity of shares borrowed. So if a counter’s turnover on a particular day was the result of 100 transactions and if five of those transactions were loan-related, then the relevant lending percentage that is disclosed would be 5 per cent.
Hong Kong’s approach is slightly different and more targeted. Like Australia, naked shorting is not allowed though like on the ASX, there are exceptions - market makers for example, are allowed to indulge in naked shorting as part of the service they provide.
As for covered shorting, the exchange designates which stocks can be lent and thus shorted. The list of designated stocks is reviewed every quarter and currently has 445 names.
Brokers who decide to borrow stock to go short have to indicate that the trade is a short and cannot sell below the best current ‘ask’ or selling price.
The exchange then collates this data and publishes a ‘Short Sell Turnover’ report on its website at lunch time and after the closing bell which shows for each stock the number of shares shorted and the dollar value of short sales (the information appears under the icon ‘Trading Information’).
Clearly, there is no ‘one-size-fits all’ solution to dealing with short-selling and the related disclosure issues. So which is best for the local market?
The Singapore Exchange (SGX) has yet to implement its measures but going by the proposals in its consultation paper about 12 months ago, it is leaning towards the Hong Kong model.
In November 2008, it proposed that all brokers and customers who have gone short on securities (including warrants and exchange-traded funds) have to mark those orders to indicate them as short-sales.
It also proposed to publish the total number of short-selling orders transacted for individual counters every day.
These proposals were complemented by hefty fines to deter naked shorting which although controversial and unpopular with brokers, have undoubtedly been effective in ensuring smooth daily settlement and thus minimum disruptions.
Still, despite its preference for adopting a Hong Kong-type model, it might be worth SGX’s while to study the ASX’s disclosures that were introduced last week since they too were formulated in response to public outcry in the wake of the Lehman crash.
Perhaps a combination of the two approaches might be possible, that is, provide investors with an idea of how much scrip lending there is for each stock as well as the proportion which are for short sales.
It’s certainly worth considering.
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