stock market

There's been much talk, most of it at least tacitly approving, of the restrictions or bans imposed in the past few days on so called "short selling" company shares. Most of you probably don't know that my first career, straight out of school., was as a trader on the stock exchange, followed by stints in several stock-broker firms mostly in private client advice and fund management, before I got into IT - which was as a result of my city experience. That's all a bit apropos of nothing really. After all, you'd be right in thinking that if I had been successful in this first career I might now be funding a think tank or something. But it gives a little background to my knowledge of this issue.

Short sellers, per se, are not the problem here it seems to me. Indeed the stock exchange relies on players prepared to go short - that's what market makers are effectively obliged to be prepared to do when they make a price.

Short selling is also an important way of the market getting the information it needs to make accurate value assessments. Longer term shareholders may have more emotional reasons than pure profit to resist pressure. Even perhaps just inertia. Sometimes even tax considerations. Short selling is also a way in which holders of stock can increase their returns on the stock by renting it to the short sellers. Little risk to them.

In my day, you could short sell, effectively, for fourteen working days. The London Stock Exchange used to work on a fortnightly settlement cycle. So for example a deal you do tomorrow, if tomorrow was a new cycle, would not need to be settled until the Monday in the middle of the next fortnightly cycle. If you went short tomorrow, you could, potentially, buy back for cash settlement (a special, premium service for urgent trades that was settled the next trading day) as late as the Thursday night before settlement day - so giving you fourteen trading days to see the stock fall and buy it back.

Nowadays everything is more or less "cash settlement" with positions settled the next working day - hence the self limiting requirement to borrow stock to deliver on short positions.

No, there's nothing wrong with short selling. Once you realize that the secondary market is stocks and shares is a big gambling den in any case, how can you outlaw one type of gambler and not another.

The real problem, it seems to me, with the run on HBOS shares for example, blamed on "short sellers", is the idea that some market players, hedge funds were cited, were "hunting in packs". Now, it is conceivable that even if there's nothing wrong with the fundamental financial health of a company, such a "pack" could be strong enough to provoke a run on a stock simply by weight of numbers. This, however, would be market manipulation. It would be legal, ethical, and even just plain sensible, to suspend trading in a particular share, or even in the whole market, if there was such illegal manipulation going on, or suspected. If a suspension was unwarranted, there should still be the equivalent of a "stewards inquiry" to determine if there was manipulation, a cartel operating, and if so how to punish them.

If the fundamentals were bad for HBOS, and actually I suspect that they were worse than the financial watchdogs have been saying - otherwise opening their books would have been enough to disprove the rumours - then the short sellers simply administered the coup de grace a bit more humanely perhaps than dragging it out for weeks more uncertainty.

I very much suspect that some hedge funds and private equity fund managers do aggressively hunt in packs occasionally. The fact that the secondary market is a gambling den makes it likely. That needs investigating. Market procedures for suspending trading in a market in which the true value of a company has become impossible to assess immediately need looking at. But having a go at the short sellers, who could, after all, just be the people maintaining liquidity in a particular market, is simply creating a scape-goat. The authorities should be ashamed.