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Short selling and the ASX

Discussion in 'Shares' started by lauries, 27th Feb, 2008.

  1. lauries

    lauries Member

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    Location:
    Brisbane, Qld
    Has anybody else been following the short selling issue?

    Finally, the commentators are beginning to give it the airplay it deserves:

    Business Spectator - Investors must fight back

    Business Spectator - Why ABC copped a kicking

    Whilst there should be no issues with short selling as a legitimate tactic, it is the assymetry of information which the sellers use to their advantage that is the trouble.

    I do not support the notion of litigation as only the lawyers win from that, and that decries any personal responsibility in investing.

    I believe all short selling positions should be disclosed to the market, in the same way that all holdings are known to the market.

    Unfortunately, the shorters will resist as they know that the information will be used to squeeze them and they don't operate well on a level playing field.
    They seem to have no issues using their confidential knowledge of directors personal financial affairs to squeeze others, so any arguments against full disclosure would be disingenuous.

    Additionally, I believe that any person holding a short position should disclose that when providing commentary - much as there is an expectation that those holding a security disclose that holding.

    The ASX is charged with providing an orderly market and retaining confidence. It has clearly failed. This market is looking like a stomping ground for cowboys - a hoedown if you like!

    I know that I am looking at ways that I can invest directly on other exchanges where there will be a greater reward for the same risk that the ASX is currently displaying.

    The US markets are looking benign in comparison!

    Laurie
     
  2. Tropo

    Tropo Well-Known Member

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  3. Rod_WA

    Rod_WA Well-Known Member

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    Short selling is a legitimate strategy, but this is more than simple short selling.

    Hedge funds are borrowing stock from institutions simply to launch a market moving drive south, and hopefully cause a snowball effect as large leveraged holders (eg directors of the company) are forced into margin calls.

    The illegitimate practice is that institutions are lending the stock that they carry on behalf of long term holders, knowing that the share price is about to be attacked.

    If the institutions are the rightful owners, then there is no reason for them to want the share price to plunge.

    If the institutions are not the rightful owners, then they have no right to pass the shares to the hedge funds. What if the rightful owners decided to sell en masse and the shares were not available since a hedge fund had shorted them??

    Until something is done about it, I suggest you go and look for heavily leveraged mid-cap companies that have large ownership by a few directors and private owners, and short them yourself. There's every chance the hedge funds will attack this next.
     
  4. lauries

    lauries Member

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    Hi Tropo

    Thanks for the Investing 101 discourse.

    From your link:

    "Short selling must take place in accordance with the ASX Market Rules. Short selling is not permitted if:

    -The security is under an offer of takeover.
    -The security is not a designated Approved Short Sale Product or Approved Short Sale ETF.
    -The order's price is lower than the last sale price, e.g. you cannot place an order to short sell BHP for $17.00 if BHP last traded at $17.01 or higher.
    -No more than 10% of the securities on issue may be short sold."

    You may not be aware that 157 million ABC shares out of 475 million on issue were traded yesterday. Most would have been hedge funds shorting outside the ASX.

    Fairness is not the issue, as I said:

    "Whilst there should be no issues with short selling as a legitimate tactic, it is the assymetry of information which the sellers use to their advantage that is the trouble."

    The real issue is the undermining of confidence in the ASX to run an orderly market if market particpants are allowed to bypass regulations.

    The risk/reward ratio does not favour operating on the ASX unless they get serious.

    Note, I am not referring to retail investors, as it is next to impossible for them to operate outside the ASX framework.

    I was hoping for a bit more informed commentary rather than a trite response about "fair play".

    Laurie
    Disclosure - I hold no shares in ABC nor am I in any way affiliated with the company. I did have our eldest child booked into an ABC centre, but we declined the place.
    I am short in stature but not short in the market:)
     
  5. lauries

    lauries Member

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    Hi Rod

    Those issues you raise are all part of it. The ASX is conflicted and is not handling it well. They need to acknowledge their inadequacies and hand over the compliance side to a regulatory agency, similar to the SEC.

    We would be better off investing directly on the Sensex or Shanghai Composite where the rewards have far outstripped the Australian indices, for essentially the same regulatory environment/risk.

    This poses a real threat to the ASX in terms of confidence.

    As to your suggestion:

    Once it's in the media, it's a mugs game. My bet is the new game for the smarties will be to follow the retail shorts (who have to disclose on the ASX) and squeeze them!

    Who's next for financial judgment day? | smh.com.au

    Remember, according to the pantsman, "Life wasn't meant to be fair"

    Laurie
    Disclosure: I am long in the market, but not long where it counts:D
     
  6. Tropo

    Tropo Well-Known Member

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    "was hoping for a bit more informed commentary rather than a trite response about "fair play".


    O.K....
    With time I learnt few things.
    I do not believe what I read or hear about SM/finance market ect.
    A lot of people think that Stock Market is a good place to invest. I always used SM as a tool to make money, not a place to invest (my view only!!!).
    That is why I developed my own ‘way’ to deal with it.

    As long as your decisions are based on TV news, AFR ect...you’ll be disappointed most of the time.
    Try to learn how to deal with ’dirt’ and learn how to swim with ‘sharks’.
    The ABC case you are talking about is of no surprise to me. Happened before and will happen in the future. There is not much you can do about it..

    Happy investing! :D
     
  7. Rob G.

    Rob G. Well-Known Member

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    Managed funds being trusts, then this sounds like a breach of the fiduciary duties of the Trustees.

    The Trustees are limited in their powers to deal with trust property, and in spite of any clever drafting of the deed, there could be grounds for unit holders to recover their losses from the Trustees - based on Trust Law and the relevant State Trustee Acts and also Corporations Law.

    Cheers,

    Rob