The Times explains how short sellers abuse markets

The Times describes how the Financial Conduct Authority is starting to intervene to prevent share values and the companies behind them being destroyed by market manipulation for short term profit.

Markets are caught short by traders’ wrong information

Alex Ralph

July 13 2015

Traders who deal in shares they do not own are running the risk of creating false markets at a time when indices are already unusually volatile.

Short-sellers are issuing incorrect information about their holdings to the City regulator and those positions are making their way into rival dealers’ trading terminals unchecked.

There have been 34 identified cases of short-sellers having to correct public positions previously notified to the Financial Conduct Authority since European rules were brought in at the end of 2012 to root out potential abuses.

The figures emerged after Sylebra, a Hong Kong hedge fund, took a huge short position last month in AO World, the FTSE 250 retailer. The trade, which appeared to involve an 11 per cent stake, flummoxed the market before turning out to be wildly wrong.

The FCA is refusing to reveal details of the 34 cases. It considers the corrections to be confidential.

Short-sellers sell stock that they have borrowed in the expectation that the share price will fall and they can buy it back more cheaply. While some of the errors may have been genuine, finance experts raised concerns about the potential to make money from issuing incorrect positions by deliberately creating the impression of a large sale and forcing down the price even more.

Paolo Volpin, professor of finance at Cass Business School, City University London, said: “If you can get away with it . . . you could try and do it more often. The concern is it’s a way to make money.”

The 2012 rules were designed to bring greater openness to the market by forcing short-sellers to report positions to regulators once certain thresholds have been breached.

Sylebra appeared on trading terminals as one of the top shareholders in AO World. The retailer has been one of the most heavily shorted stocks in Europe, but the aggressiveness of the bet left many in the markets scratching their heads before the FCA corrected the position.

The hedge fund blamed a misplaced decimal point. It said that it meant to reduce its short position to 0.11 per cent, but a mix-up on the form submitted meant the 11 per cent position found its way into the market. Jeff Fieler, at Sylebra, blamed the FCA for making the short position public, suggesting that the regulator should have realised the position was incorrect as it had been notified privately.

However, an FCA spokeswoman said that the “short position of 11 per cent reflected the information originally submitted. Once we became aware that a correction was required, we moved quickly to ensure that the correct information was reflected on our website.”

A private share notification must be made to the FCA via email through a form available on the regulator’s website when the net short positions of shares reach 0.2 per cent of the issued share capital. Short positions made public are picked up by Bloomberg and displayed on traders’ terminals.

The FCA can take action, including penalties and suspensions, if short-sellers fall short of reporting requirements.

Shares in AO World, which floated at 285p last year, closed 1¾p down at 131p on Friday.