Ann: Trading Halt, page-818

"I hope BP are proactive in not allowing stock into the wrong hands and making it so easy for shorts to cover everyone MSB raises funds. "

Let me explain to you how the game works:

The overarching premise is that BP acts in the commercial interests of, well, BP.


The broker stands between two clients - the investment institutions that give it stock execution business and companies that give it corporate finance business (stock issuance and underwriting and other advisory).

As opposed to super funds (and investment managers managing capital on behalf of super funds), which tend to be lest active in terms of stock trading (and hence generate lower levels of brokerage commissions) hedge funds are generally far more active in the market (hence, paying out far higher levels of brokerage commissions).

So when a hedge fund, who is short a stock and wants to cover in a capital raising event (therefore not requiring on-market purchase to cover the short position), the broker tends to allocate stock to that high-paying client far sooner than to some of its lesser, long-only more passive clients.

The relationship between a broker and a hedge fund client often runs far deeper than one imagines. Often, when brokers are struggling to get a float away, or to execute on a difficult line of stock, hedge funds will step in to provide liquidity by taking up the stock that others market participants might not want. And then those hedge funds will dribble that stock into the market in ensuing days/weeks. Often even at a loss.

Why, you may ask, would hedge funds wilfully assume losses like this?

Here's why:

Because when hedge funds want to be looked after (either by getting a disproportionate allocation of a hot IPO, or by getting stock in a capital raising to cover their shorts), they know they will be.

That's simply the broker looking after its own interests.


The fact is that, while companies can try to be specific in terms of who is excluded from being allocated newly issued stock, enforcing those sorts of prescriptions is almost impossible; for example, if a company raising capital expressly tells the broker that the stock should not be issued to shorters, all that the prime broker does is issue it to another broker as part of a "sub-underwriting arrangement", and that underwriting broker simply parlays the stock to the shorter who wants the stock. Happens all the time.

What companies can do is they can specify who gets stock, but to the extent that there is more stock being issued than the company dictates is to be allocated, such surplus stock gets issued to the broker's mates (aka its best clients).

That's the game.

.