The Great Short Selling Debate
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The Great Short Selling Debate

The Great Short Selling Debate


Trading Features / Strategies from Simon Denham of Capital Spreads.

As Barclays finally throw in the towel and dip a toe into the rights issue trough it is instructive to talk once more about the merits of short selling. For all of the fireworks over the last two or three months who have been the ones proved to be:

a) correct, and
b) truthful?

Firstly, most of the Banks denied point blank that they would need capital injections and then (it would appear) deliberately mislead on the size of the cash call required before finally stabbing their long suffering shareholders in the back with the ultimate climb-down. Financial journalists were writing that RBS would need no money, then around £5bn and finally £12bn. One assumes they were being briefed by somebody.

The short sellers held their nerve through it all and given all the comments from the various Bank Boards at the time it would have seemed that they were wrong. If they had been wrong and were forced to cover a short position in a fast rising market that would have proved to be very expensive mistake indeed. Even now, after the last of the big Banks has had a drink most of the stocks are still down near to the lows.

As the FSA continues to hunt for someone to blame in the HBOS debacle three months ago it is instructive to comment on the share price action since that fateful 19th March. On that day the stock hit a low of around 400p but then a huge swathe of investors, small and large, bought in on the news that the Board was insisting that they had no problems and even the BOE and the FSA popped up to lend support. The price then rallied all the way back to 615p. Now, of course, we know better. The stock is currently down at 315p having hit a low of 250p last Thursday a drop, from the high of the bounce, of almost 60%! Imagine if you were the person buying at 615p! So who is the enemy of the investor, is it the short seller who in this case gave a very good early warning to anyone holding the stock or is the blame better attributed elsewhere.


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Real long term investors need have no fears over short selling as they are supposed to be in the game for an extended term and are buying on Yield, prospects, growth etc. The fact that the stock has fallen only means that they could have bought at a better price not that their long term analysis was wrong. If the real value of banking stock is at the current levels then we would have got here anyway, in the long run, without the Shorters getting involved. If banking stock is truly very cheap at the moment why are the big investors not piling in forcing the price higher? Personally I believe that this is a good place to be getting involved for the long term but it may be a hard road with some serious bumps on the way.

Trying to force a share price lower via a bear attack can be a very dangerous activity for the participants as they can easily get caught the wrong way round. A badly conceived strategy can lead to a concerted move by Market Makers or a Stock Lending moratorium by major holders which can easily lead to a spike higher which forces the shorter to take a major hit. This happened to my own company at the end of 2007.

Readers should always remember that anyone can take advantage of being short via a huge array of instruments. Buying Put options, Selling Calls, selling stock and borrowing, Selling CFDs or, most simple of all, just making a Sell Spread Bet. It is not just ‘the big hedge funds’ who can take advantage of an inflated share price.

Of course this is no defence of market manipulation but the law is just as clear on Short selling as it is on Insider buying. Deliberately manipulating the market by circulating false rumours is illegal and should be punished. Unfortunately, for the past three months, the rumours have proved to be true so who will punish those who denied them?



The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'The Great Short Selling Debate' edited by SD, updated 17-Jun-08



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Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

The contents on CleanFinancial.com are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice.

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