5 things to know about… short selling | White & Case LLP
1. What is short selling and why is it controversial?
Short selling involves betting that the stock price of a listed company will fall. This is usually done by the person placing the bet (usually a hedge fund) by borrowing shares which they then sell and then buy back at a lower price in the future. The hedge fund will then return the shares it borrowed to the lender and pocket the difference between the price at which it sold and then bought the shares. Critics argue that speculating on a price drop is unethical and can destroy value for long-term investors. In times of market stress, regulators have introduced temporary bans on short selling and / or market restrictions on short selling to moderate the decline in stock prices.
2. How is short selling regulated in the UK?
In the UK, regulators said there was no evidence to suggest short selling was a driver of the market downturn. Indeed, the Financial Conduct Authority has underlined the important role that short selling can play in properly functioning markets. Examples such as NMC in the UK and Wirecard in Germany supported this thesis. However, short selling has come under increased scrutiny since the very public GameStop saga earlier this year, which already sparked a review by the Securities and Exchange Commission in the United States. Afterwards, it is likely that regulators in other countries will take a close look at what can be done to improve market transparency.
3. UK Disclosure Obligations
In the UK, a private notification to the FCA must be made when the net short position in the shares reaches 0.1% of the issued share capital of the company, and again at every 0.1% above. A public disclosure is triggered at 0.5% and each 0.1% above. Public disclosures can be found on the FCA website.
4. Objectives for 2021?
There are record amounts of money looking for PSPC and ESG opportunities and we are already seeing PSPC and some ESG-friendly companies being targeted by short sellers. Investors will be watching closely for PSPC founders who rush into unattractive deals in a saturated market and companies are over-selling their ESG credentials. As regulators play catch-up to hold companies accountable for the ESG statements they make, short sellers will continue to target pockets of overvaluation.
5. The big court
Based on the book by bestselling author Michael Lewis (from Moneyball and The Blindside fame), the 2015 film, starring Christian Bale, Steve Carell, Ryan Gosling and Brad Pitt, chronicles the lives of several professionals in the financial industry. in the mid-2000s as they predict the collapse of the real estate bubble. Based on real life stories, these people have won millions by betting against (shorting) the housing market. Film uses unconventional techniques to explain complex financial conditions – Ryan Gosling uses Jenga to explain tranches of mortgage-backed securities, Selena Gomez explains the ripple effect caused by secured debt obligations during a game of blackjack and, in a cameo appearance, Margot Robbie explains subprime mortgage-backed securities, while drinking champagne in a bubble bath. Another wonderful example of where the financial world meets in Hollywood.