I have some experience (12 years) of working within banks who, on behalf of fund managers, trade stocks in global markets but I stress I was very much on the fringes and I would in no way describe myself as an expert.
Over this time, I developed the opinion that financial institutions, and all the various companies they interact with, would rather most of their activities remain out of the public eye particularly the ins and outs of the murkier side of their dealings. I also think when “explaining” many of their processes and activities, they use a multitude of acronyms and waffle language to try to confuse the wider public.
Very recently, we have seen some of these dirty dealings come into the public limelight with the selling & buying of the stocks of Gamestop, a videogame store chain. I may be wrong but I am pretty sure the financial institutions, stock markets, regulators and traders will try very hard to close ranks to release pitter patter nonsense to hide the truth and hope it all blows over. This will be a form of damage limitation to avoid further regulations so their dodgy dealings are not compromised and can continue unaltered. Albeit the Gamestore shenanigans are on a smaller scale but this will be much the same as what happened after the financial crash of 2007/2008 triggered by the sub prime mortgage market collapse in the USA which came to the fore following the short selling of stock.
Short selling is just one of the preferred methods of “investment” by Hedge Funds. I find it as difficult as everyone else to get my head around it all but, in very simple terms, this is it how it works.
The hedge funds look at business trends for companies they believe are, or soon will be, struggling. They then review the markets to check whether, in their opinion, the value of the stocks are over priced and/or there is potential for the value of these stocks to go down considerably. It’s not always quite so clear cut because a company may be doing adequately well enough but even so, still become a target for Hedge Funds to short sell their stock.
If they believe things are a runner, under stock market rules they are allowed to “borrow” shares in a company and an agreement is reached for a specific date by when these shares will be returned and a “cost” for this transaction is usually agreed.
The Hedge Fund traders then contact shareholders, especially those who hold a significant amount of shares in a company, to find those willing to “lend” them. Once terms are agreed between the borrower (Hedge Fund) and the lender (fund manager / shareholder), the shares are handed over to the Hedge Fund to do whatever they will with them during this fixed period.
Their traders will then proceed to sell all this stock as quickly as possible which normally results in the value of the stock being driven down. Once the price of the stock has dropped significantly, the same traders (Hedge Funds) will then re-buy the stock at much lower price. They will then be returned to the original lender before the loan period has expired.
This means the difference in the price of the stock when it was sold and the lower price it fell to at the time when bought back is pure profit (minus any fees and cost agreements under the original terms of the loan). And these profit figures are often eye watering.
In my opinion, these activities are most definitely immoral and push right on the edges of legality. However, as already stated they are not currently illegal. Some may say ah well it’s only people being inventive and researching stocks which are over valued and then gambling on them falling. However, these short selling activities may (and often do) cause a company to be pushed over the edge resulting in it going into liquidation followed by the inevitability of job losses, pension funds losing money and everything else which goes hand in hand with businesses going bust.I may have got some of the specific details wrong but it is basically what short selling is all about. I firmly believe, as a society, we should all demand for such dealings to come under serious public scrutiny. Without a shadow of doubt in my mind, I believe the vast majority of people will be disgusted by it all and governments will hopefully come under pressure for new laws to be introduced which make such activities illegal. Should this happen then the enforcement of those breaking these laws should be rapid, severe and unrelenting.
Kevin Smith
PLEASE SUPPORT US FOR JUST £2 A MONTH
