The practice of short selling and spreading rumors in order to boost better returns and the effects caused by invisible short sellers is in the media more and more often in recent months. It has become almost a fixture on the pages of Financial Times, for example.
Back in March 2008 it was the banking sector. It was front page news in financial publications and even made it through to mainstream news on the BBC. The banking sector was badly hit by a sharp decline in share price, followed by fluctuations that seemed to have gotten out of control (and which were explained with the moves of short sellers). The sell off was attributed to a panic created artificially by short sellers who reportedly spread rumors about an impending crisis at certain banks, which made the share price plunge down. The short sellers (and, alongside, all those watching the markets closely) then picked up shares in the companies they had ruined on the cheap (there was frantic buying into the same banks just a few days afterwards, just about the time that the short sellers would have committed to buy). It was reported that the practice was to be investigated by the FSA (which is still on the case, as more and more instances of massive short selling moves keep coming about).
More recently, in June 2008, similar fluctuations occurred with the housebuilding companies in Britain. A 13 June 2008 article entitled Wild Fluctuations at Housebuilders in the FT opens with the observation:
Speculators, short-sellers and market rumours were held responsible for wild swings in housebuilders’ share prices on Thursday, with Barratt Developments gaining ground for only the second time in four weeks.
The swings were so hectic, that dealing into shares (which moved 50 points up and down within a single day) was even suspended for a short while, so that the computing systems could cope with the amount of trades going through. The article is illustrated with an extraordinarily choppy chart of the intra-day movements in Barratt’s (BDEV) price on June 12th, showing such drastically swinging movements that the chart could be used as a teaching tool for day traders.
“This isn’t a case of fund managers suddenly liking the stock,” according to Will Duff Gordon of Data Explorers, which monitors short-selling interests. “The moves come from short-sellers taking profits while they can.”
The ‘short sellers’ are invisible. Even though the people who attribute the problems of various banking or building companies stock to the behind-the-scenes activities of short sellers, do not name names — rather, the say, it is known who the ‘culprits’ are. The interesting issue is that lately the short selling theme is taking the shape of a morality discourse, and there will be more to come as the tendency seems to be toward making it morally unacceptable. Morality, however, does not have a straightforward place in the rational world of finance, so they want measures that would regulate and probably even outlaw it.
Short selling is usually the domain of those in the know. Ordinary novices like myself still stick to the idea that in order to sell something, you would need to have bought it first. Not so, apparently, as when you ‘short’ you do not need to owe what you sell, and you do not even need to put up the money for this virual transaction until a later point in time when you need to ‘buy’ what you have ‘shorted’. A very different concept from the one of prudent buying low and selling high. It is more about boldness and daring speculation, as we learn from the interesting chatty City Slickers: Make a Million from the Declining Market by Anil Bhoyrul. This cheaply published paperback is not a book that will make you a significantly better investor, it is not analytical enough. But it is an interesting glimpse into the reality of short-sellers, into the daily life of the City, and into the behavior of day traders. And these are things that are worth knowing more about, especially as for people like myself, in the absence of the ‘mastermind circle’ recommended by Andrew Carnegie and Napoleon Hill, investing is a lonely pursuit. Mr. Market, in Benjamin Graham’s terms, may be the temperamental guy whose mood swings we never come to fully understand or predict. Not so, however, when one reads Bhoyrul’s book: helps to get to know at least one of Mr. Market’s aspects — the logic of the ‘moods’ related to short-selling frenzy.
© Dina Iordanova
21 June 2008