Cutmore: Shorts are Pariahs?

Geoff Cutmore

Few topics generate such a strong response from you our audience. The title of one of the e-mails s we received this morning as we were discussing the FSA’s decision in the UK to lift the ban on short selling of financial stocks was simply "Shorts = Scum."

Successful short selling requires a unique outlook on the world. Most investors have a natural bias towards the long side of the equity market; there is a desire to be optimistic built into the DNA of most people. The short seller operates differently, assuming a negative view on market levels, share prices and business models.

The advocates of short selling see it as a cleansing mechanism which forces the market to more quickly adjust to "realistic" valuations. It is not enough that buyers decide not to buy at a certain price -- the short seller wants the market to sell the stock to adjust the price.

Shorting has received a bad press because it has become associated through the failure of Bear Stearns and other banks with rumor mongering and underhand market practices.

There is also a view within the retail investing community that shorting is a stitch up. It impoverishes the retail hand to the benefit of the professional investor. As they see it, the pension fund manager gets rewarded for lending the stock, the hedge fund manager gets rewarded for shorting the stock and it is the retail investor, who is long the stock through the pension and their own portfolio, who loses out.

Our guest on the program this morning, Julian Pittam at Data Explorers, was making the case for shorting. He represents the financial communities belief that a lot of bank share prices have been driven down further than they might have been had the short-selling ban not been implemented. The funds that might have held bank stock, and used a short to hedge the position were not able to do that, as a result they just sold the bank stocks and avoided exposure in the sector.

My own take is that governments pumping money into listed banks are politically not prepared to see the market taking on the other side of the trade. However, "right" it may be to allow the mechanism of shorting to function, the UK Treasury didn’t want to see the market whittle away the value of the capital through further destruction of listed equity.

Stocks down

I’m happy to hear your views. Here is a sample of some more of the correspondence we received. ....

Short selling performs a service by flagging the problem. Companies should be allowed without restrictions, except that naked shorting should be stopped. That having been said, it makes no difference, there are options and CDSs, etc. which explains why the companies discussed fell anyway.

-- Philip, Bali

The only way I gauge short sellers is by putting them in the group of people who sell something they do not own. In my honest opinion the only word for this is theft.

-- Frederick

Short selling should be completely illegal for all stocks. It is much too easy for hedge funds and other big institutions to manipulate the stock price and spread false rumors.

Just look at the widespread fraud surrounding short selling in small-cap stocks.

-- Karl, Thailand.