Data reveal short sellers not to blame for UK bank falls
Short sellers could not have been to blame for the share price falls in UK banks, according to data just published, as consultants warn the shorting freeze imposed by the Financial Services Authority has damaged market confidence.
The level of stock borrowing of HBOS shares, whose price tumble last week led to the bank being taken over by rival Lloyds TSB, was 3% of the available shares last Friday, according to UK analyst DataExplorers. It had been at about this level, which is typical of all UK public companies, since August.
Investors need to borrow stock if they want to sell shares short, and the level of stock borrowing is used as a proxy for the amount of short selling.
The levels of stock borrowing of other UK banks was also in single digits. At Bradford & Bingley, it was 6.8% of the shares available to be lent; at Alliance & Leicester, it was 6.8%; Standard Chartered, 2.3%; Lloyds TSB, 3.1%; Barclays, 4.5%; HSBC, 2.8%; and at RBS, 1.2%.
Jacob Schmidt, chief executive of independent hedge fund research firm Schmidt Research Partners, said: "The numbers are extremely low. They are lower than we thought."
UK politicians have lambasted hedge funds as "spivs" that used short selling to force down the share price of UK banks such as HBOS. The low levels of stock on loan show these criticisms are misdirected, Schmidt said. "Hedge funds are only partially to blame, if at all."
Moreover, the effect of the ban has been to reduce confidence in the market for financials stocks, according to investors.
Although their critics claim short sellers artificially dampen companies' share prices, asset managers say short selling normally plays a role in lowering the price of shares that have risen too high and, while short selling is frozen, investors are worried that share prices will no longer reflect the value of the companies concerned.
Schmidt said: "Now even a long-only investor cannot buy financials shares with confidence because the market is being held up artificially and everyone knows it."
Jeremy Hall, a partner and fund manager at boutique hedge fund manager Cartesian Capital, said of the freeze: “It could lead to a technically-driven market as share price movements are not down to fundamentals.”
The volume of trading on Monday in HBOS' shares, 8 million, was the joint-lowest in 50 days, according to data published on Bloomberg. The 20 million shares traded yesterday was back within the normal range.
A spokesman for the FSA said it hoped the introduction of the freeze on short selling on selected financials stocks, which allows existing short positions to be maintained but bans any new or increased short positions, would clamp down on market abuse and would therefore increase confidence in the market.
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