I have debated with myself whether to post this, and decided...

I have debated with myself whether to post this, and decided that I should. The intention is not to use HC exposure to pressure ASIC in any way, but to let people hurt by short selling know that someone has actually complained. I'll try to remember to post the final outcome when it comes, but if others wish to contact ASIC on this topic either way, feel free.


Letter to ASIC [I have been informed that it has gone to their specialist area for consideration] 12 Jan 2016:


I am complaining about the way in which short selling is permitted on the ASX.

When an entity borrows shares and then sells them on the normal market, they are effectively issuing new shares. This is because the original owner of the shares retains their interest in the shares (and will in due course profit or lose from share price movements, dividends, etc), but the new buyer also has full interest in the same shares. A company is restricted in its ability to issue new shares, because they have to get shareholder approval in order to increase the number of issued shares by more than 15%. Short sellers have no such restriction - they are completely free to flood the market with as many new shares as they wish. Currently, six ASX listed companies are reported as having more than 15% of their shares shorted : MTS 19.9%, JBH 18.84%, MYR 18.18%, MND 16.42%, GXL 15.62%, WSA 15.53%.

This is a grossly unfair corruption of the otherwise orderly market.

I used the 15% limit as a specific example, but short selling has problems at all levels. For example, short selling can be used to deliberately damage a company: If a company attempts to raise capital by a rights issue, say, then a short seller can issue enough new shares to force the share price below the rights issue price and thus profit by making the rights issue fail. That is just one example of many.

The structural problem with short selling is that it is allowed on the main market. If entities that wished to profit from a falling share price were instead required to do so on a derivative market - using CFDs or options for example - then there would be no structural problem. I urge ASIC to change the rules and regulations as soon as possible to remove short selling from the main market.

There are further issues, such as the very limited reporting requirements and the fact that short selling data is not made public in real time, but these too would be resolved by banning short selling from the main market.

It can be argued that shareholders cannot be prevented from lending their shares for short selling. I would disagree. If the regulations state that this is not permitted, that on transfer of shares the shares are considered to have been given or sold, and that an agreement to deliver borrowed shares back to the lender cannot be enforced, then the practice would necessarily stop.

I should probably have stated explicitly that short selling is still problematic below the 15% level, but the above is the letter that was sent.