Shorting with Spread Betting

FX Spread Betting

The CleanFinancial.com guide to short selling.


About Short Selling

“Shorting”, also known as “Short Selling” and “Going Short”, is the term used for speculating on a market to fall and is something which cannot be done directly in standard share trading.

Shorting lets investors make a profit from a falling market.

If you use a spread betting account for your trading, whether you decide to go long or short, you can still lose more than you initial deposit.

Solid market analysis is crucial and your should only trade with money you can afford to lose.

Like the adverts say, “spread betting is a leveraged product which carries a high level of risk to your capital and can result in losses greater than your initial deposit. Ensure you fully understand the risks.”

What Markets Can You Short?

Using a spread betting account with any of the firms listed below or listed on our CFDs guide, and given normal market conditions, you are able to short a wide range of:
  • Stock Market Indices e.g. the FTSE 100 and Dow Jones
  • Forex Markets e.g. GBP/USD and EUR/USD
  • Individual Shares e.g. Royal Dutch Shell, Vodafone, Google, Lufthansa etc.
  • Commodities e.g. US crude oil, silver and gold
  • Treasuries e.g. US government bonds
Note that some spread betting firms only let you buy (go long) of individual US equities. Why? This is because spread betting firms find it difficult to offload their risk exposure on individual American stocks.

Unfortunately, I had a lot of problems trying to short Facebook after the IPO and I couldn’t get a trade on.

Having said that, I also wanted to short LinkedIn, and the fact that I couldn’t get that trade on saved me some money as the stock rallied.

Nevertheless, I have been able to sell some US stocks like Manchester United using Financial Spreads.

In general, I’ve never had a problem selling the FTSE, Dow, gold, crude oil or any forex market.

Note that there was a short selling ban on financial stocks in 2009, see below for details.

Companies That Let You Short a Market

The following firms let you buy (go long) and sell (go short) a wide variety of markets:

Who Can Short a Market?

It is not just ‘the big hedge funds’ who can take advantage of an inflated market.

Whilst you cannot short a market through most normal share trading accounts, many investors like to sell through spread betting and CFDs as these are relatively simple ways of selling a market.

Whilst less common, investors can also short many of the popular markets through binary trades and financial fixed odds.

Slightly more complex methods include Buying Put options, Selling Calls and “borrowing stock and selling it” (with the hope of buying it back later at a lower price).

Selling

Short Selling Example

As a quick example, let’s say the FTSE 100 daily market is 6120 – 6121.

If you expected the FTSE 100 index to fall over the coming days, you could open a ‘sell’ position of £10 per point at 6120 (the sell price). This means that for every point by which the FTSE 100 fell, your spread bet would make you a profit of £10.

Therefore, if the FTSE 100 market fell to 6090 – 6091, you could cash in your gains by buying back £10 per point at 6091 (the buy price).

Your profit = (6120 – 6091) x £10 per point = 29 x £10 per point = £290

If however, the price of the FTSE 100 rose to 6150 you might want to close your trade i.e. to stop you losing any more money.

If so, your loss = (6120 – 6150) x £10 per point = -30 x £10 per point = -£300

For more examples see:

Should Short Selling Be Allowed?

Below, an interesting article from Simon Denham of Financial Spreads. We originally posted this on 17 Jun 2008 i.e. during the UK banking crisis but before the short selling ban that started on 19 Sep 2008.

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:
  • Correct, and
  • 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 they were saying RBS would need around £5bn and finally £12bn. One assumes the journalists 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 the pessimists were wrong. If the sellers had been wrong and were forced to cover a short position in a fast rising market that would have proved to be a 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 their lows.

As the FSA continues to hunt for someone to blame in the HBOS debacle three months ago it is worth commenting on the share price action since that fateful 19 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 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?

Long-Term Investors vs Shorters

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.

Shorting Covering Hurts

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.

Short Selling vs Market Manipulation

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?

What Happened to the Stocks During the Short Selling Ban?

The Financial Services Authority lifted the ban on short selling UK financial stocks on 16 January 2009.

Was it worthwhile? Perhaps, perhaps not.

Either way, by the end of the ban, most financial stocks were worth 50% less than when the ban came in to force.

With such falls it was difficult to argue to keep the ban in place.


Important Disclosure Obligations When Taking Large Sell Position

The following was written on 18-Jan-09 and so may be out of date, if in doubt, seek professional financial advice and/or check the FCA.org.uk website.

The FSA (now FCA) have extended the disclosure obligations for short selling of stocks in UK Financial sector companies until 30 June 2009.

Disclosure of a net short position in the stock of a UK financial sector company will continue to be required once a position reaches 0.25% of a relevant firm’s issued share capital.

However, from 16 January 2009, further disclosure will only be required if a short position changes by a further 0.1% of issued share capital (i.e. at 0.35%, 0.45% etc).


A Guide to the Financial Stocks Short Selling Ban

Updated 16 Jan 2009.

What happens during a ban? What can you do / what can’t you do? The rules will differ but looking for some clarification, Financial Spreads sent us the following details on how they are treating the various bans.

For details you’re advised to contact your own spread betting company however the following probably serves as a good guide to what you can and cannot trade.

In line with regulatory instructions concerning Short Selling of UK, US, Irish, German and French Financial Stocks and all Australian Financial Instruments, Financial Spreads wishes to inform its customers that short selling in the mentioned instruments is temporarily prohibited.

A full list of the affected markets

In these designated markets clients may sell to close an open long position and may take new long positions but are now prohibited from entering into New Net Short Positions†.

Clients are not required to close existing short positions and may keep these open as long as they wish.

Where the onus is on FinancialSpreads.com to ensure compliance of short selling restrictions markets will only remain available via telephone trading for the foreseeable future.

Where the onus is on the client (you) to ensure compliance of short selling regulations the markets will be available for online trading but, as required by regulations, Financial Spreads shall report to the relevant authorities ALL clients suspected of actions resulting in Market Abuse.

Market Abuse in this instance is defined by us as ‘a suspicion on the part of Financial Spreads of the creation of a New Net Short Position by the client concerned’.

Please note that whilst it is our intention to help our clients understand the nature of these temporary trading restrictions we would like to remind you that it is your responsibility to keep up to date with any developments of this nature as these regulatory strictures apply to you as well as to us.

These restrictions are likely to be imposed by an increasing number of jurisdictions across the globe and while Financial Spreads will do its best to update its clients on any such changes it will remain your obligation to be aware of any legal restrictions on your trading activity.

We trust that you will understand the reasons for our actions but if you have any queries then please contact Customer Services on the following numbers:

† New Net Short Position

No bet placed by any client in a restricted market should result in an overall exposure that would profit in any way from the fall in value of the particular market in which the bet has been placed (i.e. have an open, uncovered, short).

A client may open a new short bet on a UK financial stock with Financial Spreads if (and only if) he/she can demonstrate upon request that they have an equivalent long position via an alternative financial instrument at the precise time that the short position was placed. An equivalent position might be:-
  • Stock held by the client in that same stock
  • A long CFD position in that same stock
  • An option in that same stock creating a long delta position equivalent to the sell bet
  • A long (buy) spread bet in that same stock with another spread betting provider or in a different maturity date, but the same stock, with Financial Spreads
  • Any other recognised form of market instrument that can demonstrably be shown to have an outright long bias
If the client subsequently wishes to close his long position in whatever instrument he/she MUST close the short first. Otherwise the sale would create a net short with the spread bet.

Restricted Markets

In line with regulatory instructions concerning short selling of UK, US, Irish, German and French Financial Stocks and all Australian Financial Instruments, we wish to inform our customers that short selling in the mentioned instruments is temporarily prohibited.

Whilst we do our utmost to enforce these new trading rules, please remember that we provide an execution only service and it is ultimately your responsibility to ensure that you abide with any regulatory restrictions on short selling.

We will endeavour to keep this list up to date but cannot guarantee its accuracy and it should be used as a guide only.

UK
  • Admiral Group
  • Alliance & Leicester
  • Alliance Trust
  • Arbuthnot Banking Group
  • Aviva
  • Barclays
  • Bradford & Bingley
  • Brit Insurance Holdings
  • Chesnara
  • Close Brothers Group
  • European Islamic Investment Bank
  • Friends Provident
  • HBOS
  • Highway Insurance Group
  • HSBC Holdings
  • Investec
  • Islamic Bank of Britain
  • Just Retirement Holdings
  • Legal & General Group
  • Lloyds TSB Group
  • London Scottish Bank
  • Novae Group
  • Old Mutual
  • Prudential
  • Rathbone Brothers
  • Royal Bank of Scotland Group
  • RSA Insurance Group
  • Schroders
  • St James’s Place
  • Standard Chartered
  • Standard Life
  • Tawa
Ireland
  • Bank of Ireland
  • Allied Irish Banks
  • Irish Life and Permanent
  • Anglo Irish Bank Corporation
France
  • Allianz
  • AXA
  • BNP Paribas
  • Credit Agricole
  • Dexia
  • Societe Generale
Germany
  • Aareal Bank
  • AMB Generali
  • Commerzbank
  • Deutsche Bank
  • Deutsche Borse
  • Deutsche Postbank
  • Hannover Ruckversicherung
  • Hypo Real Estate
  • MLP
  • Muchener Ruckversicherung-Gesellschaft
US

The SEC has compiled a list of around 799 US incorporated companies, a list of which is available from the following link http://www.sec.gov/rules/other/2008/34-58592.pdf.

Australia

The ASIC has prohibited the shorting of all indices and stocks. Readers, please note there was more information on http://www.asic.gov.au/asic/asic.nsf but that page has now been removed.