Much to do about grumblings
30 September 2014
Tim Smith of SunGard’s Astec Analytics suggests that there is more the industry can do to educate the masses about securities lending and short selling
Image: Shutterstock
I recently encountered a pensioner who criticised short sellers, securities lenders and data providers and analysts. I found it very difficult either to get a word in edgeways but also to put across the benefits of a fully functioning securities lending market undertaken by professional participants. The only thing that we agreed on was not to expect a Christmas card from each other, either this year or for many years to come.
In light of that encounter, I have news for all those assembling in Florida at the Risk Management Association’s (RMA) annual conference: securities lending professionals are still not that well-liked among the general populace.
A few years ago, even before the 2008 financial crisis, the RMA and other bodies agreed that education was a good way of promoting the benefits of securities lending to the general public. This decision had followed a plethora of ‘academic’ articles, based mostly on very old data and on some major misconceptions, which seemed to cast doubts on the benefits of short selling, and by association, securities lending.
Furthermore, this was at the height of the perceived borrowing-to-vote scandals, so our industry was under pressure even before the crisis hit. When it did, the political element kicked in and regulators and politicians around the world responded to the scorn and criticism being heaped upon us by taking a closer look at securities lending and introducing bans on short selling.
As a whole, the industry provided many articles as well as more up-to-date and relevant data in response. Charts and complicated calculations were provided together with detailed analysis to prove that short selling was not a negative factor but was indeed a benefit to global capital markets. The comments made by the chairman of the US Íø±¬³Ô¹Ï and Exchange Commission (SEC) that bans on short selling had not been a particularly effective strategy was due, in small part, to this effort.
Nevertheless, increased scrutiny of short selling and securities lending has been implemented around the world, with a focus on transparency and reporting. In fact, stringent tax measures have been suggested that could make it uneconomical to undertake securities lending transactions. Just to prove that the education war has not yet been won, when this effect was pointed out, many politicians were not only unmoved, they were even pleased that this would be the effect.
So, as the great and the good gather in Naples, Florida, for the annual RMA Conference on Íø±¬³Ô¹Ï Lending in October, it might be good to restart the educational process with a new approach concentrating on presenting the case to the people who really matter—the pensioners and other ultimate beneficial owners. The simple questions that need to be addressed are: do short sellers intentionally drive down prices to make a profit, affecting individuals’ pensions or personal holdings? And are we in securities lending assisting them in this endeavour?
If this is deemed to be dumbing it down or patronising, that would be a mistake. There is a tendency to overcomplicate what we do. How many of us have not, at some stage of our careers, argued a point about which we were not clear by throwing in meaningless verbiage, including the occasional gratuitous Greek letter or two, in the hope that our interlocutors will be satisfied? I know I have and I also know that I have received nodding heads as a result. I think the questions asked need to be answered, and we can do a better job of providing the right answers. Let’s review two examples.
With GoPro, at the IPO and a few weeks afterwards, there were continuing charges of the short sellers ‘going after’ the stock. The price went up and down as Figure 1 suggests, and the volume of shares borrowed for shorting moved around as well. Indeed, there seems to have been a period at the end of July and August when the loan volume increased before a rise in market price and then dropped when that market price kept going up. Surely it was a case of ‘what does not kill you makes you stronger’?
That is the typical case for the IPO, but what about a long-standing company that is continually in demand from the short sellers, such as Sears? Yes, it is under pressure, but have the short sellers really driven it down? Of course not. Look at Figure 2, which compares market price with volume of securities on loan as a proxy for short selling for the last year.
Certainly, there are points where it could be argued that volumes increased before a decline in the price. However, there are just as many times when the decline in price went in the opposite direction to an increase in loan volume, and sometimes even preceded it.
GoPro and Sears are just two stocks, and there are numerous other examples. The difficulty lies in the ability to convey the case effectively and succinctly. We need the right soundbite, not a 100,000-word treatise that can be consumed by the average person. And the responsibility may lie with industry associations and professionals—we could produce content for the annual analysis that pension funds send to clients, or attend insurance conferences to present the case. In any event, if popular concerns are not addressed, then regulators will likely be driven by their political masters to over-regulate and over-scrutinise.
In light of that encounter, I have news for all those assembling in Florida at the Risk Management Association’s (RMA) annual conference: securities lending professionals are still not that well-liked among the general populace.
A few years ago, even before the 2008 financial crisis, the RMA and other bodies agreed that education was a good way of promoting the benefits of securities lending to the general public. This decision had followed a plethora of ‘academic’ articles, based mostly on very old data and on some major misconceptions, which seemed to cast doubts on the benefits of short selling, and by association, securities lending.
Furthermore, this was at the height of the perceived borrowing-to-vote scandals, so our industry was under pressure even before the crisis hit. When it did, the political element kicked in and regulators and politicians around the world responded to the scorn and criticism being heaped upon us by taking a closer look at securities lending and introducing bans on short selling.
As a whole, the industry provided many articles as well as more up-to-date and relevant data in response. Charts and complicated calculations were provided together with detailed analysis to prove that short selling was not a negative factor but was indeed a benefit to global capital markets. The comments made by the chairman of the US Íø±¬³Ô¹Ï and Exchange Commission (SEC) that bans on short selling had not been a particularly effective strategy was due, in small part, to this effort.
Nevertheless, increased scrutiny of short selling and securities lending has been implemented around the world, with a focus on transparency and reporting. In fact, stringent tax measures have been suggested that could make it uneconomical to undertake securities lending transactions. Just to prove that the education war has not yet been won, when this effect was pointed out, many politicians were not only unmoved, they were even pleased that this would be the effect.
So, as the great and the good gather in Naples, Florida, for the annual RMA Conference on Íø±¬³Ô¹Ï Lending in October, it might be good to restart the educational process with a new approach concentrating on presenting the case to the people who really matter—the pensioners and other ultimate beneficial owners. The simple questions that need to be addressed are: do short sellers intentionally drive down prices to make a profit, affecting individuals’ pensions or personal holdings? And are we in securities lending assisting them in this endeavour?
If this is deemed to be dumbing it down or patronising, that would be a mistake. There is a tendency to overcomplicate what we do. How many of us have not, at some stage of our careers, argued a point about which we were not clear by throwing in meaningless verbiage, including the occasional gratuitous Greek letter or two, in the hope that our interlocutors will be satisfied? I know I have and I also know that I have received nodding heads as a result. I think the questions asked need to be answered, and we can do a better job of providing the right answers. Let’s review two examples.
With GoPro, at the IPO and a few weeks afterwards, there were continuing charges of the short sellers ‘going after’ the stock. The price went up and down as Figure 1 suggests, and the volume of shares borrowed for shorting moved around as well. Indeed, there seems to have been a period at the end of July and August when the loan volume increased before a rise in market price and then dropped when that market price kept going up. Surely it was a case of ‘what does not kill you makes you stronger’?
That is the typical case for the IPO, but what about a long-standing company that is continually in demand from the short sellers, such as Sears? Yes, it is under pressure, but have the short sellers really driven it down? Of course not. Look at Figure 2, which compares market price with volume of securities on loan as a proxy for short selling for the last year.
Certainly, there are points where it could be argued that volumes increased before a decline in the price. However, there are just as many times when the decline in price went in the opposite direction to an increase in loan volume, and sometimes even preceded it.
GoPro and Sears are just two stocks, and there are numerous other examples. The difficulty lies in the ability to convey the case effectively and succinctly. We need the right soundbite, not a 100,000-word treatise that can be consumed by the average person. And the responsibility may lie with industry associations and professionals—we could produce content for the annual analysis that pension funds send to clients, or attend insurance conferences to present the case. In any event, if popular concerns are not addressed, then regulators will likely be driven by their political masters to over-regulate and over-scrutinise.
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