Short selling has come under fire during this financial crisis for causing the collapse or at least price plummet for major corporations. First it was the shorting of banking shares that caused untold trouble during the height of the crisis. At one point short-selling was actually banned both here and in the U.S. More recently the shorting of Euro futures contracts caught the attention of the media as it was viewed that short-selling causes untold amounts of downward pressure that does not reflect the underlying asset, put simply the rationale in the market becomes “if he’s doing it, then so should I”.
Now I personally have no problem with short selling, for all the hedge funds that made a lot of money, there were many more that blew up with going long during the good times in ‘follow the herd’ type strategy. As Warren Buffet said, “only when the tide goes out do you see who is swimming naked”.
Recent developments with a few investment banks and a particularly powerful hedge fund has, however, highlighted that insider trading still goes on but it is very important to distinguish between short-selling because you think the price will fall and short-selling because you are partial to insider trading. The act of short-selling as a method of trading is not the villain here. The reason that I am talking about short-selling is because the recent rally in Sterling for the last two days, whilst positive news, is not entirely down to renewed confidence and thus a Sterling buying spree. Instead, the positive data that has emerged from the U.K has resulted in a reduction in the number of short contracts that traders and investors are currently holding.
Sterling is up on the day quite handsomely vs. U.S. dollar and Australian dollar but current trading levels (GBP/USD 1.5155) are nothing to write home about. Analysts said traders were cutting bets against sterling after these positions hit a record high last week. Some said that for the moment, this repositioning was overshadowing political uncertainty, which has stung the pound since the start of the year. “The reasons to be short sterling are still in place but are the reasons to be record short sterling there?” said Peter Frank, currency strategist at Societe Generale in London. Furthermore, we have a long weekend coming up and consequently the Sterling rally is a correction as traders trim their exposure/risk to Sterling for the extended market closure. The main concern for the time being is the threat of a hung parliament, as long as this political uncertainty remains then traders will short-sell Sterling futures.
