Market Snaps: UK’s short selling regime faces shakeup

Shorting stocks is not a straightforward process nor one that is particularly advisable for typical investors looking to build wealth over time through capital gains and dividends being reinvested.

It’s also got a public relations problem – investors (and regulators) like to blame hedge funds taking short positions when things go wrong. Last week’s conviction of Citron Research founder Andrew Left has hardly done the cause of short sellers much good either. Left, who was perhaps the best-known celebrity activist short seller, used his public profile – including appearances on CNBC, Bloomberg et al – to manipulate stock prices, prosecutors said. He’s appealing.

But short selling – the process of borrowing stock to sell into the market and buy back later, in the hope that the price has fallen - does form part of an important part of the market’s price discovery mechanism. As per a 1977 model set out by Edward Miller, shorts help make the market function because it allows shares to reflect the valuations of bears who do not own the stock. Activist shorts can shine a light on companies that the usually positive sell-side analysts fail to do. The Left conviction has got many investors wondering just what the rules are around shorting, in the US at least.

Which is why it’s opportune timing for changes and clarification to the UK’s short selling regime to be coming into force. 

Currently in the UK the Financial Conduct Authority publishes a list of disclosed short positions above 0.5% of a companies share capital. This helps show what hedge funds are short on which stocks.

From 13 July, the FCA will no longer disclose individual net short positions, so we won’t see who is doing the shorting. But the data will show aggregate short positions above the lower threshold of 0.2% of the issued share capital, much lower than the current 0.5%. The change reflects a shift away from the EU system or reporting to a more US-style approach.

While DIY investors may not benefit from a long-short investing strategy (too complex), being able to see which stocks are being shorted the most can help – it's unclear whether losing visibility of who is behind the trades will make a difference.