Argonaut boss Barry Norris has called for “beta jockey” long-only managers to stop complaining about short selling amid coronavirus volatility as the Financial Conduct Authority refuses to follow other European regulators in banning the practice.
Belgium, France, Italy, Greece and Spain are among countries that have implemented brief short selling bans, but the UK regulator has decided not to follow suit.
The FCA issued a statement on short selling on 23 March stating there is no evidence the practice had been the driver of recent market falls. “A great many investment and risk management strategies rely on the ability to take ‘long’ and ‘short’ positions,” the FCA said. “These benefit a wide range of ordinary investors including the pension funds for employees of companies and local government.
“We also note that short selling is a critical underpinning of liquidity provision. The loss of these benefits would need to be carefully balanced before determining that any intervention to prevent short selling was appropriate.”
‘Whinging from long-only fund managers’
Rathbones head of multi-asset David Coombs believes the Financial Conduct Authority should take a leaf out of its European counterparts’ books and implement a ban on short-selling, but this view has found little favour among other industry participants.
Argonaut chief executive and manager of the Argonaut Absolute Return fund Barry Norris (pictured) argues short selling should be encouraged by regulators in order to crackdown on stock market fraud by unmasking bogus management and poor business models.
Norris also says over the past few years markets have been in a bull market, which no one wanted to ban. “We now hear this whinging from long-only managers when they have lost their clients a lot of money and they suddenly think it is unfair that prices go down as well as up,” he says.
He adds: “Short-selling has recently been a far more difficult way to make a living than being a ‘beta jockey’ fund manager. If active fund management is to justify itself against passive it needs to offer something more than expensive beta.”
Government coronavirus support packages create moral dilemma
But Coombs says that while 99% of the time he would not call for such a move, recent market conditions created by coronavirus panic are being influenced by extraordinary monetary intervention, which has made the practice of short-selling “morally and financially unacceptable”.
He says: “We’re not just bailing out banks this time, we’re bailing out all sorts of corporates, from self-employed right up to airlines, and that, both morally and financially, makes a big difference.
“We’re seeing companies looking for help stopping their dividends, which seems totally appropriate, but the pressure from short sellers in an illiquid market to hit certain stocks and sectors when there’s no buyers may distort normal market-efficient capital allocation.”
Coombs feels there is a moral dilemma about whether or not markets are allocating capital efficiently due to the unprecedented government financial support, which makes him nervous about allowing short selling to continue.
He adds: “This has a real impact on people’s jobs and health at a time when society should be working together.”
FCA did ban short selling in 2008
Between September 2008 and January 2009 the FCA, then called the Financial Services Authority (FSA), did ban short selling of a list of 32 financial stocks, stating “current extreme circumstances have given rise to disorderly markets”.
In a statement on 17 March, the FCA alluded to its previous ban: “We have rarely imposed our own ban on the short selling of UK shares (although we did take some comparable actions in a small number of cases during the 2008 financial crisis).”
Coombs speculates the FCA’s ban in 2008 was likely part of the “too big to fail” mantra, whereby the regulator and Bank of England were ready to do all they could to keep banks solvent in order to keep the economy going.
During the latest crisis, however, there is not one sector, like the banks, under scrutiny. “I guess the FCA thinking at the moment is there isn’t that level of stress in the system for us to step in,” he adds.
Liquidity, price discipline and fraud detection
But Psigma Investment Management chief investment officer Tom Becket says changing the rules around short selling would do more harm than good because a ban would prevent governments using functioning financial markets to identify issues.
“I’m not sure anyone asked if short selling should be banned when the market was booming, so I am not of the view that you should change the rules here,” he says.
“Short sellers provide liquidity to the markets, encourage price discipline and have been much quicker than the authorities to spot frauds. None of that has changed simply because people are now losing money.”
Becket says if governments feel that markets are not functioning properly and, most importantly, retail investors are being put at a disadvantage, then they should consider suspending all trading rather than simply banning short selling. Moreover, he notes history shows that the banning of shorts does not work.
This view is backed up by a paper published in 2017 by academics Alessandro Beber, Daniela Fabbri, Marco Pagano and Saverio Simonelli which concluded: “Contrary to the regulators’ intentions, financial institutions whose stocks were banned experienced greater increases in the probability of default and volatility than unbanned ones, and these increases were larger for more vulnerable financial institutions.”
Everyone should be helping each other out
Coombs accepts this is his “in the teeth of the crisis” view, adding he might well look back in a month’s time and think, ‘That was a silly thing to think’.
“I’m fully willing to accept that,” he admits, “but right now we don’t know the extent of what will be drawn down from that stimulus, we don’t know how much public money might get wasted through leakage and I just feel that right now short selling might exacerbate the problem because of artificial conditions.
“It feels that morally everyone should be working towards helping each other out and short selling… I just feel slightly uncomfortable with that right now.”
