What happens when ..., page-8

@stockrock,

Here's a snippet of information that might help answer your question:

On 27 March - the day MSB raised capital through the issue of 26.25 million shares. On that day, the number of MSB shares that were sold short amounted to 24.105m.

Two days later - a period that coincides with the ASX's T+2 settlement procedures - the shorted position had fallen to 20.674 million shares, i.e., a reduction of some 3.6m

It looks to me like the broker allocated a not-insignificant quantum of the placement stock to some of its hedge fund clients, thereby allowing them to cover their shorts without having to buy stock on the market.
(Presumably, these hedge fund clients generate a lot of brokerage commission, making it commercially sensible - or a commercial imperative, more likely - for the broker to acquiesce to the application by hedge funds for stock.)


That's the financial services industry in action:

Hedge funds short stock in anticipation of a capital raising.
Broker generates positive research before capital raising.
Retail investors respond accordingly.
Trading in stock is halted for capital raising.
Raising occurs at a discount to last traded price.
Hedge funds, who have short sold, apply for stock to cover their short positions.
Broker allocates stock to hedge funds, as requested (because hedge funds are valuable clients).
Hedge funds cover shorts and move on (or resume shorting again, in anticipation of the next capital raising).

The winners out of all of this:
- The hedge fund (self-evidently)

- The broker (clipping the ticker on many levels)
- The company (it gets its cash)

The losers in all of this:
- Retail investors who get diluted.

Nice system, huh?

(And people question why some investors don't like investing in companies that need to access equity capital markets for their funding)