LONDON - To the general public, Friday's transatlantic ban on short-selling banks may have felt like the authorities were finally putting a muzzle on reckless hedge funds. To the traders themselves, it was more of a noose.
Bleary-eyed hedge-fund traders in London came into their offices on Friday to find that they could no longer go short on financial companies--to make bets that their share prices would fall--and profit when they did. The unprecedented, temporary ban instated by the SEC and Britain's FSA, lasting till Oct. 2 for 799 U.S.-listed stocks and till January next year for 29 London-listed stocks, is meant to ease volatility in the markets. (See "Short Sellers Get Squashed.") But those in the business think it's a short-sighted "witch hunt" that will make markets more volatile than they already are. "It weakens confidence in financial markets further," said Steve Schlemmer, head of European sales at Churchill Capital, a London-based brokerage firm that deals exclusively with hedge funds. "It might make people on the street feel more secure that Royal Bank of Scotland is up 30% or whatever, but it makes the real professional money managers less secure." "It's the kind of thing you would expect from less developed markets," said Stephen Rothwell, a trader at Argos Capital in London. "But I guess it's symptomatic of the U.S. and U.K.'s way of dealing with things at the moment." Shorting is the bread and butter of hedge funds, epitomizing the act of "hedging" against risk. A typical hedge fund will go short on half of all its trades. "It's a big problem for us," said one trader, who said the complete ban on short selling was unexpected. "It's pretty extreme." There are a number of concerns about what the clampdown on short selling could do to equity markets. Some say short selling actually helps smooth out the market, providing more of a balance of sellers to buyers. There is also the argument that short sellers aren't entirely to blame for the recent bloodying of Wall Street institutions like Morgan Stanley (nyse: MS - news - people ) and Goldman Sachs (nyse: GS - news - people ) in the markets. According to dataexplorers.com, a firm that tracks short interest in companies, short sellers made up 3.9% of Morgan Stanley's outstanding shares on Sept 17, the day before the company's shares went into freefall. On the same day, they made up just 3.1% of Goldman Sachs' outstanding shares. "How can you blame 3% to 4% of the outstanding shares for determining the price level of a company?" said Schlemmer, who has been working with hedge funds for 15 years. "I think it's a shame. Hedge funds are contrarian, value-oriented investors for the most part, and some will go under, and some will go very cautious and have less money to support worthy industries." Whatever effect short sellers do have on banks' share prices, it will be more concentrated on banking shares from Continental Europe and Asia, which are still kosher for shorting following the regulatory clampdown. That effect has yet to be felt though: Banking shares from Paris to Frankfurt to Oslo were rallying strongly on Friday, along with those in London and New York. For now, many traders are fuming at the SEC and FSA, and quietly formulating their own, better solutions. "The regulators are addressing the wrong issue. We need the Augean stables cleansed," said one. "You need greater disclosure on financial accounting," said Schlemmer. "There's not enough transparency on what banks own. If you want people to buy banks, provide more information on what these banks own." Hedge funds might be the "hyenas" of the financial world, said another trader, "but every eco-system needs hyenas." Edward Beckett contributed to this article. http://www.forbes.com/markets/2008/09/19/short-sellers-riposte-markets-econ-cx_po_0919markets18.html I never think of the future - it comes soon enough. ::Albert Einstein :: --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
