US SPECIAL – Stock lending operations within investment houses have hit out at reports that they may be inadvertently fuelling a market in short selling in the current volatile economic climate following Tuesday’s terrorist attacks in the US.

Reacting to claims that hedge fund outfits may be shorting certain prices, with a view to driving down the market, stock lending outfits have defended the trade, arguing that they are adding liquidity to a market badly in need of cash flow.

Bob Ash, senior vice president for securities lending at State Street, comments: “I have strong views about this. Stock lending adds liquidity and facilitates arbitrage, that arbitrage in turn smoothes out equity markets and adds to efficiency.
“Without it the price changes would be enormous because there is such pent up demand.”

Ash is critical of what he believes is misinformation in the market: “I think there is an underlying false appreciation of this business. I think people think believe there are firms taking huge naked short positions.
“The great deal of the trading strategies are market neutral and so they bring efficiency and liquidity to the market.”
He adds that it is business as usual at State Street in terms of stock lending, bar the current drop in stock lending volumes.

Tim Harrison, spokesperson at ABN Amro Mellon Global Securities Services, notes that while volumes have been significantly down, it was expected given circumstances in the US.
However, he adds: “Any accusation of stock lending per se being detrimental to the market equilibrium we would vigorously defend. The lender actually gives liquidity to the market, which would actually be much more at the mercy of unscrupulous speculators without it.”

Andrew Speers, who runs the European based stock lending product at Barclays Global Investors concurs: “We provide a service to the market that gives stability, continuity and liquidity.”

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