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ASIC to probe short selling of shares


frankmal

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Article from the Herald Sun; reporter is Stephen McMahon

 

Australian Securities and Investments Commision ASIC to launch probe.

 

 

March 12, 2008 12:00am

 

THE corporate watchdog has ratcheted up the pressure on investors involved in short selling, insider trading and market manipulation, with market participants facing requests for information.

 

The Australian Securities and Investments Commission yesterday expanded its investigation into global markets to pressurise international hedge funds.

 

In the recent volatile stock market some large investors are believed to have played a major role in destabilising the share price of companies such as ABC Learning and Allco Finance Group.

 

The ASIC move comes after three days of heavy selling on the stock market, which is now at its lowest level in 18 months.

 

Since the market peaked in November, the benchmark S&P/ASX 200 index has dropped 25 per cent.

 

Short selling is the borrowing of shares from a broker to sell before buying them back at a lower price, pocketing the profit and returning the shares to the broker.

 

ASIC's formal inquiries relate to "conduct which could involve spreading of false or misleading rumours or predatory trading that could amount to market manipulation or insider trading".

 

Last week ASIC and the Australian Securities Exchange sent initial reports on illegal trading activities to the Federal Government.

 

Corporate Law Minister Senator Nick Sherry yesterday said the Government was expecting a full report from both bodies within weeks.

 

"Treasury has been asked to explore our legislative options, including amendments to the Corporations Act that could potentially clear up some of these issues," Senator Sherry said.

 

"I am advised that the regulators have now also made formal requests for information from several market participants in relation to possible market irregularities."

 

After years of criticism as being toothless, the upswing of short selling amidst the recent share market turmoil may result in the Government giving ASIC and the ASX greater powers to police the market.

 

In a bid to halt the hedge funds, ASIC has begun talks with its American, British and Hong Kong couterparts "seeking their assistance on any international aspects".

 

Most hedge funds are based outside Australia, with many operating in tax havens such as the Cayman Islands.

 

ASIC has also joined forces with the Australian Prudential Regulation Authority to launch a new online reporting system for breaches by finance services companies.

 

 

 

 

 

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http://www.news.com.au/heraldsun/story/0,2...444-664,00.html

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on squak bax this morning merrill lynch and others were mentioned as inside tradingers they even memtioned a name of a adviser that sent out false info to clients??? mmmm dodgy business http://www.sharescene.com/html/emoticons/lmaosmiley.gifhttp://www.sharescene.com/html/emoticons/lmaosmiley.gifhttp://www.sharescene.com/html/emoticons/lmaosmiley.gif

 

later

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In reply to: frankmal on Wednesday 12/03/08 11:00am

Shortselling has been the subject of an extraordinary amount of nonsense and misinformation in the media recently. Some of it seems to be due to a lack of knowledge, some of it seems to emanate from vested interests and some of it seems to be related to dogma that says that shortselling is evil per se. Any other ideas about why apparently expert people keep getting it wrong?

 

Here is another example of misinformation, albeit much less serious than some of the journalism on offer.

 

QUOTE
Short selling is the borrowing of shares from a broker to sell before buying them back at a lower price, pocketing the profit and returning the shares to the broker.

 

It would be more accurate to say that "Short selling is the borrowing of shares, not necessarily from a broker, to sell before buying them back, at a price that might be higher or lower, and then returning the shares to the owner."

 

Shortselling is not evil. Vested interests, unlevel playing fields and lack of transparency are evil.

 

 

 

 

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In reply to: ooga on Wednesday 12/03/08 05:34pm

 

Spot on.

 

My theory is that the journos were holding a truckload of ABS.

 

Add to that a heap of analysts, advisers and fund managers who are looking particularly silly, a bunch of brokers who are terrified that volume will disappear, and executives who have made a mess of their companies and their personal finances and you have all the ingredients for a witch hunt.

 

I don't recall them sqealing when dodgy companies were being spruiked on the way up.

 

I don't claim to be a value investor, but if I were I imagine that I would be relishing what they must perceive as buying opportunities.

 

I am quite happy to see illegal practices brought to light and dealt with, but I can do without all the drivel about the evil short sellers.

 

If you want to make a living from the market and haven't been prepared to go short in recent times you are probably getting used to catfood and waiting in bus queues.

 

If it's going up buy it, if it's going down sell it.

 

Regards,

Monteverdi.

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In reply to: Monteverdi on Wednesday 12/03/08 08:30pm

valid points, both of you, Monteverdi and ooga

 

In its purest form, shortselling is a routine business transaction:

 

the borrower assumes the full risk, as he has to hand back the parcel, come what may. If he guessed right, he pockets the profit; if not, he coughs up.

the lender still holds the shares, enjoys all the benefits - dividends, splits, bonus shares - and gets a little extra for providing the risk-taker with an opportunity to make (or lose) money.

 

Where some pollies may become concerned is in the general area of Financial Advice. Has it ever happened to any of you that a broker rang you with a hot story about stock XYZ that was about to take off or be dumped? Depending of course on what their one BIG client wanted to do: get rid of a parcel at a good price, or buy as cheaply as possible.

 

Let's say one of those "deep-pocket men" has an interest in lowering the price of XYZ without doing the dirty work himself (= not selling part of his holdings) because that might make him conspicuous. Why not get a broker/ an advisor to do the ring-around and have retail clients short-sell. At the right time/ price, Mr Big jumps in and buys as much as possible. The little bunnies that have to give the borrowed stock back may or may not get a chance to cover at a profit - but that is their risk, right?

 

Conclusion: Shortselling per se is not evil, it's a financial tool for two parties to conduct business. But some uses of that tool can indeed be unethical and evil. Just like a hammer can be used to nail decking to a balcony or to bash somebody's lights out.

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In reply to: arty on Thursday 13/03/08 12:19am

 

One reads reports of naked short selling in the U.S. and Canada when brokers and big clients collude to sell shares that don't exist. That is both immoral and illegal but my reading suggests that it is not policed very vigorously and that the penalties are not much of a deterrent. The evidence suggests that the practice is more widespread than the authorities are prepared to admit.

 

Of course this is indefensible.

 

I understand also that the floor traders in the U.S. would know the location of the majority of the stops and would drive the prices up or down to hit them. This may be more difficult with electronic trading.

 

There are those who are uncomfortable with short selling on moral grounds which is a personal decision that one respects. However, I see no ethical difference between short selling and selling a long position in the expectation that it will go down.

 

As you suggest, there is a political element and I have no doubt that pressure is being applied. The public are prepared to accept a significant drop in their equity over time without becoming too vocal ( e.g. TLS2) but if it happens overnight they want somebody to do something.

 

Superannuation aside, there are a lot of people in the market who shouldn't be as they have no idea of risk control or money management and no real understanding of what they are doing or why they are doing it. They can get away with it in a bull market, but when things turn they are lost.

 

Regards,

Monteverdi.

 

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In reply to: Monteverdi on Thursday 13/03/08 08:21am

you're absolutely right, Monteverdi

 

There are plenty of punters out there who read the papers, believe every scrap of funnymental con - and when they've "been had" they cry for "somebody to do something".

 

Trading is a profession like any other: You got to study it long and hard; there's good teachers and shady characters; and if you don't know what goes on you get fleeced.

 

Sorry if I sound cynical - (no. not really, just learned the hard way to be realistic http://www.sharescene.com/html/emoticons/wink.gif )

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In reply to: arty on Thursday 13/03/08 09:33am

the positions you espouse in this matter reflect an acceptance of the practise of trading shares as an end in itself.this is of course one attitude to the market is its a share market simple. there is however another role that is fundamental to the economy ,investment in companies that are essential to the productivity and wealth of the country. the problem with practises such as shorting is that it detracts from the investment value of shares as the market becomes a lottery.as someone has commented there is a political demension to this.the debate is similar to the massive upheavals created when huge money influence currencies a few years back and almost bankrupted some economies.if the share market exists to provide capital to corporations then some practices may lead to that outcome becoming a side show to some other strategies.once the asx decides the core business of its market then it has to regulate to preserve the integrity of that.

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In reply to: sandy1066 on Friday 14/03/08 10:48am

 

Thanks Sandy,

 

certainly I regard share trading as an end in itself, but I accept that the market has additional functions.

 

I submit that the detrimental effects of short selling on the integrity of the markets are vastly over-estimated. The practice is as old as the markets.

 

The Weekend Australian recently contained an opinion ( to paraphrase) that it is almost impossible to make money over time shorting sound companies.

Whether this is true or not I believe that good companies, and their investors, have nothing to fear from the shorts.

 

The companies with the elaborate financial models may have had their demise accelerated, but it would have happened anyway. The warnings were there for all to see (particularly with hindsight).

 

Nobody enjoys seeing an investment wiped out overnight, but we all have to accept that we were wrong from time to time, cut our losses, and go to the next opportunity.

 

Perhaps a painful but quick realisation is better than a long drawn out process that causes a buy and hold investor months of pain, and delivers that same result.

 

Regards,

Monteverdi.

 

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In reply to: sandy1066 on Friday 14/03/08 09:48am

QUOTE
the positions you espouse in this matter reflect an acceptance of the practise of trading shares as an end in itself.this is of course one attitude to the market is its a share market simple. there is however another role that is fundamental to the economy ,investment in companies that are essential to the productivity and wealth of the country. the problem with practises such as shorting is that it detracts from the investment value of shares as the market becomes a lottery.as someone has commented there is a political demension to this.the debate is similar to the massive upheavals created when huge money influence currencies a few years back and almost bankrupted some economies.if the share market exists to provide capital to corporations then some practices may lead to that outcome becoming a side show to some other strategies.once the asx decides the core business of its market then it has to regulate to preserve the integrity of that.

 

Shortselling is now unpatriotic? Such a confusion of issues is typical of religions. To unravel all the many flaws in these arguments would take more time than I am willing to devote. However I will point out one thing. You comment that "the problem with practises such as shorting is that it detracts from the investment value of shares as the market becomes a lottery". I agree with you - selling shares does tend to lower the SP of the shares.

 

Anyways, to help me get a better handle on your arguments, could you clarify if selling shares that you own is also unpatriotic? And, is it unpatriotic to sell shares that you don't really own because you bought them with borrowed money? And, is it unpatriotic to buy shares with borrowed money, which must surely also do exactly what you accuse shortselling of doing?

 

 

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