Aftermath of Short Selling Ban Lift

Shorting was banned by the Financial Services Authority last September on 34 UK financial stocks after short selling was blamed for wiping millions off the value of bank shares, betting as it did that prices would fall as the recession deepened.

Perhaps unsurprisingly on January 16th, the following day after the lifting of the ban, the number of new trading ideas submitted by institutional brokers to traders and portfolio managers for the 34 financial companies which had been covered by the ban grew some 1200% percent over January 9th.

At the end of the trading session on January 16th, on the day that short selling was again allowed, a familiar pattern had re-emerged. Barclays closed sharply lower down at 25% (although the bank reported that its profits would be ‘well ahead’ of the pounds 5.3bn predicted by some forecasts), while Royal Bank of Scotland fell by 13%. Barclays kept falling until January 23rd when the share price finally reversed direction.

‘The shorting ban has been lifted and I guess the short guys have been sharpening up their tools and looking to see who they’ll have a pop at next,’ said James Hamilton, a Numis Securities analyst.

Excerpt from Risk News -:

‘Figures from London-based Dataexplorers.com, a provider of information on the securities financing industry, show that the percentage of shares outstanding on loan for three major UK banks Royal Bank of Scotland, Lloyds Banking Group and HSBC rose only slightly between January 15 and January 28. Royal Bank of Scotland shares on loan went from 0.22% to 0.62% of total shares outstanding, Lloyds shares from 1.19% to 1.3% and HSBC from 1.53% to 2.47%.

Barclays proved a slight exception. Its shares outstanding on loan rose more sharply after the ban was lifted, from 3.14% on January 15 to 5.81% on January 23. Over this same period, its share price dropped 61% from 130.4p to 51.2p.

However, with Barclays’ share price recovering dramatically on January 26 to 88.7p, traders who had sold the stock short could have got badly burnt. The turnaround came after an open letter from the bank’s chairman, Marcus Agius, and chief executive, John Varley, reassured investors that the bank was adequately capitalised and would not require an injection of government money.

There was minimal evidence of short positions being closed the next day, however, with Barclays shares outstanding on loan only dropping 0.02 percentage points to 5.79%. As of January 28, this level had risen again to 6.19%, while the share price stood at 107p.’

The FSA will continue to require disclosure of net short positions in UK financials until June 30 if the position reaches 0.25% of the institution’s issued share capital.

Thoughts: I’ve always held the opinion that short selling adds liquidity to the markets and removes pricing inaccuracies. According to research from the LSE, spreads in those shares covered by the ban had widened by 150 per cent more than spreads in a control sample of other shares. Not only that but turnover in those shares included in the ban had fallen by 21 per cent when the ban was in effect, against a 42 per cent increase in turnover in the control sample. The ban failed to protect share prices when it was in force. In fact the banking sector had still fallen by 32 per cent since last September even when the ban was still in place. And it is a fact that that we have no evidence at the moment on that the removal of the ban on short selling had a significant effect on the price weakness of the share prices of UK banks. I’m only appalled and angry at the way greedy bankers and inadequate regulators have brought about the current colossal international financial meltdown.

Tags: banking, Financial Services Authority, short selling ban

This entry was posted on Saturday, January 31st, 2009 at 10:33 pm and is filed under Industry Happenings. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.