Join our community of smart investors

Short circuit

In the aftermath of Carillion’s collapse and a ban on shorting the stock of German company Wirecard, should we worry about short selling, or embrace the practice as an important component of efficient markets and price discovery?
Short circuit

Short selling has a public relations problem. Periodically banned throughout history, it’s often wheeled out as a contributing factor when a company’s shares tank, with short sellers blamed for exacerbating declines in a stock’s price, or in some cases causing it.

Regulators in Germany used just such arguments on 18 February when they announced a ban on the short selling of Wirecard (Ger:WDI), one of the country’s leading financial services firms and a new and exciting member of the DAX. With Deutsche Bank (Ger:DBK) and Commerzbank (Ger:CBK) looking like two drunks in a bar, Wirecard is seen as something of a saviour for Germany’s embattled financial services industry (and we feared the City would lose out to Frankfurt...).

But should all those hedge funds and short-term traders really get blamed when a company’s stock gets trashed? Does the action of borrowing stock to sell, in the hope of being able to buy it back later at a much cheaper price, really lead to shares falling in value, or, in the worst cases, companies failing?

To continue reading...
Join our Community of Smart Investors
  • Independent full-length company analysis
  • Actionable investment ideas and recommendations
  • Expert investment tools and data
  • Stock screens from Algy Hall
Have an account? Sign in