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The bans on short selling have caused a huge furore in the industry, so in the first of its new Vox Pop series, Automated Trader has been getting the view from the sharp end.

Vox Pop: the short selling debate ignites

What's your view on the short selling bans? 

Pairs portfolio gone pear shaped?

Execution algos coughing on new-look volume curves?

Can't get that big trade away because there's nobody to sell  to you?

Let us know - email our Editor with your view (send a pic of yourself too if you have one handy) or if you prefer drop us a line and we'll call you.

Reaction so far:

Dennis Lohfert, Director of Trading, Ion Asset Architecture: "The restrictions have been poorly ... full story

Miles Kumaresan, Head of Algorithmic Trading, TransMarket Group.: "It is a nuisance ... full story

Clive Williams, Head of European Equity Trading, T. Rowe Price London: "At the moment ... full story

John Reeve, Head of Quantitative Trading, BlackCat Capital: "After years of failing ... full story

John Reeve, Head of Quantitative Trading, BlackCat Capital: "After years of failing to tackle the obvious and growing credit bubble, the regulators have finally acted but have done the wrong thing."

 

John Reeve, Head of Quantitative Trading, BlackCat Capital

It is vital to draw a clear distinction between regulation, which is good and necessary for the orderly functioning of markets, and market manipulation which is damaging and usually illegal. An attempt to artificially raise the price of a select group of stocks by banning short-selling is clearly an act of market manipulation and one that appears to be politically motivated and founded on misconceptions.

History shows that such manipulation has a propensity to produce the opposite effect to that which was originally envisaged. At a time when the financial system is already under great stress, the ban has caused additional disruption to normal business activities and immediately caused the share price of a broader range of financial stocks to fall.

The long term effects remain to be seen, however, the financial regulators have changed the rules, mid-game with seemingly little consideration for the broader effects and with no consultation. They have appeared to be dangerously out of touch with the complexities of modern financial markets and their credibility within the industry must have suffered along with the confidence that investors place in the markets.

After years of failing to tackle the obvious and growing credit bubble, the regulators have finally acted but have done the wrong thing. This bodes ill for the future, raising the likelihood of new but poorly conceived and probably politically-inspired regulation. A question that remains unanswered is why the world's regulators failed to exercise their existing and considerable powers to rein in irresponsible lending before it grew to crisis proportions?

We will follow the progress of any legal actions that arise from the short-sale ban with interest%

 

 

Dennis Lohfert, Director of Trading, Ion Asset Architecture

The restrictions have been poorly conceived, badly executed and inconsistently applied.
The ability to short-sell assets perceived as overvalued is very critical to maintaining the informational efficiency of markets (ie prices reflect all available information).

Difficulty in short selling may have contributed to the tech bubble in the late 90s (cf. low free floats and difficulty in shorting), and the recent "bubble" in the Chinese market.  Look at the loss of wealth that resulted from those episodes! Ironically, a week after the US restricts short selling, China passes legislature allowing it for the first time because they hope that it'll re-vitalize their equity market. Short selling is an integral part of modern financial markets, period.

Restrictions on the short sales of stocks result in the underpricing of risk (i.e. they lower the cost of equity capital), which encourages "bad" risk taking and creates moral hazard --- precisely what regulators should be seeking to avoid, and something that seems to enjoy widespread public support in both the US and UK!

The short selling restrictions are adversely impacting the legitmate, long-established businesses of many traders, such as equity and ETF arbitrageurs. Thus the regulations arguably represent a transfer of wealth from those people to the shareholders of investment banks and other financial institutions that are, to the largest part, responsible for the current crisis!  Again, we're rewarding those who should be punished.

 

 

 

Miles Kumaresan, Head of Algorithmic Trading, TransMarket Group

It is a nuisance. It is also a false intervention, because the markets are not going down simply because of short sellers  they are going down because the fundamentals are poor. All the ban is doing is putting a small temporary brake on this situation; rather like trying to close the gate on a huge dam.

Miles Kumaresan, Head of Algorithmic Trading, TransMarket Group: "I think the people who will be most affected will be the stat arb players..."

I think the people who will be most affected will be the stat arb players who have built baskets and carefully constructed portfolios for synthetic pairs or similar strategies. Those baskets/portfolios will be temporarily disrupted and the optimisation and modelling processes for them will have to be rerun.  Furthermore, if you cannot short sell these financial stocks, then that puts considerable constraints on the optimisation. However, whatever return is lost due to short selling restrictions is more than handsomely made up for by the prevailing market volatility.

By contrast, the effect on algorithmic execution should be relatively small; after all the majority of stocks are unaffected by the ban. There are some stats that will change and there may be some liquidity pattern changes due to the lack of short selling, so analytics such as fill probabilities will be affected. However, not many execution algorithms use particularly sophisticated fill probabilities or liquidity measures, so the impact may not be very great. Such effects as there are will also work through the system very quickly.

 

 

Clive Williams, Head of European Equity Trading, T. Rowe Price London: "...the ban is certainly having an effect on execution algorithms."

Clive Williams, Head of European Equity Trading, T. Rowe Price London

At the moment we don't see the ban on short selling as making it much harder for us to do our job in terms of finding sufficient liquidity from sellers. However, if the ban extends right through into next year one can't be completely sure what effect it will have.

Nevertheless, coupled with the extraordinary market conditions, the ban is certainly having an effect on execution algorithms. A lot of the assumptions built into algorithms were well off the mark for the current environment, which meant they were going rather haywire last Friday, so we were trading very carefully.

Apart from the ban, another thing that will affect the viability of short selling as a strategy in the future is stock availability. Some long only institutions have fuelled hedge fund short selling by lending out their stock for minimal fees, perhaps without realising the consequences. Traditionally, index funds have been among the biggest lenders of stock and, while they may not change, at the margin people will be looking more closely at their stock lending practices and the amount of money they actually get from it. As and when the market settles down, stock lending inventory is likely to be smaller and certainly a great deal more expensive. Theres a good chance that a lot of firms will pull out of stock lending altogether.

Incidentally, I think people using execution algorithms may have found they have some unwitting exposure to Lehman in terms of outstanding trades. At the time of the trade they wont have known who was on the other side, but they will now. Unravelling all this should certainly make for some pretty good overtime for the back office...

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