Insider Trading Is The Concern

Sun Herald

Sunday March 16, 2008

David Potts

MY, HOW the regulators have got their shorts in a knot. The Australian Securities Exchange (ASX) and the Australian Securities and Investments Commission (ASIC) are on the case over smarties who sell shares they don't own that they think will drop in price. This is quite legal, only you're supposed to tell somebody, preferably them. Oh, and not spread nasty rumours about the stock. Are they serious?

Since short selling is a potential black hole with no limit to how high a stock can go (remember, you need its price to drop because you have to buy the shares to return them to their rightful owner), you'd need to use every trick at your disposal.

There is much wringing of hands going on over false or misleading rumours that led to the near-collapse of ABC Learning Centres and Allco, among others. Funny, as far as I can tell the "false or misleading rumours" turned out to be true. The directors had margin loans up to their necks and the companies were illiquid.

Most short selling is done by hedge funds, which borrow stock from specialised brokers and custodians of super funds for a fee. Super funds have been criticised for doing their members in by allowing the share prices in their portfolio to be trashed. Nice outrage but remember, at some point, the short seller has to hand the stock back, which means buying it. The savaging of bank stocks also has been blamed on short selling. Just don't mind the credit crisis, then. Short selling is certainly messier but at least it speeds up a correction that was going to happen anyway.

It's not short selling but insider trading that the odd couple should be getting stuck into. In a letter to The Australian Financial Review, fund manager Peter Morgan counted 31 cases in 14 months when the share price jumped before a major announcement. I know the market is supposed to be efficient but that's spooky. Or cheating.

As he says, instead of fretting about short selling pulling down prices, "what about when they miraculously went up?"

dpotts@mail.fairfax.com.au

© 2008 Sun Herald

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