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?