UK- The London Stock Exchange has contested recent criticism that aggressive short selling, particularly by hedge funds, is to blame for recent equity market volatility. The challenge follows complaints from companies which have led the Bank of England to consider ways of increasing the disclosure of securities lending activities.
A meeting between the central bank and other leading members of the securities industry took place last Thursday where it was agreed that, in order to assuage critics and rid the practice of an increasingly tarnished reputation, short-selling activity should be made more transparent.
Yet despite pushing for greater transparency, the UK authorities are fully aware of the benefits of stock lending, an activity permitted by the FSA and one that makes short-selling easier.
As a spokesperson at the London Stock Exchange points out: “short-selling enhances price discovery and liquidity, helps maintain orderly markets and is integral to many trading strategies such as hedging long positions or being one element of an arbitrage trade.”
Not all market participants are convinced, however, and as US global hedge fund investment consulting firm, Hennessee Hedge Fund Advisory Group, mentions: “a ‘lynch-mob mentality towards hedge_funds appears to be snowballing.”
ABP and PGGM, the Netherlands’ largest pension funds, have stopped stock lending in response to the criticism and are attempting to persuade more than 50 of the world’s largest funds to do the same.
Charles Gradante, managing director at Hennessee, defended his industry yesterday saying: “contrary to general opinion, hedge funds are not in control of this bear market, nor are they are bunch of ‘unregulated cowboys’ who are ‘talking down the market’ and ‘shorting companies into submission’.”
He admitted that a handful are shorting the market but that the majority of hedge funds are net long which accounts for their overall negative performance in July of –4.73%.
The issue of short-selling transparency, however, is not as pressing in the US as in the UK. The New York Stock Exchange, for example, publishes reports detailing short selling.
The UK central clearing and settlement body Crest is looking into the publication of regular figures on stock lending in the UK market in an attempt to disprove links between stock loans and market volatility and to bring Britain in line with the US.
The FSA is meeting with market participants next month to discuss the transparency of stock lending.