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If you guys will forgive me for cross-posting, here is what I posted on another LYC thread titled "Musings on shorting" or something like that. But that thread seems to have died, so with your forgiveness, here it is again. The points I make basically amount to the fact that we may well NOT see a spectacular short-covering rally, as much as many people are expecting one.

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Couple of points on shorting - first, a profit isn't made until the shorts are covered. The whole idea is that you sell something you don't own (eg shares that you have borrowed) then buy it back cheaper, return the shares, and pocket the difference in price.

Second - the short covering can be quite sneaky nowadays. First, it's important to realize that the institution from which you've borrowed the shares doesn't really care where you get the shares to return, as long as they are returned. So shorts can be covered on a different exchange (eg Chi-X) or even via dark pools, whereby brokers, funds, banks, etc can trade large parcels of shares without anyone outside the deal knowing about it. No rules of disclosure, and no prices or volumes recorded.

So, while a few short years ago, short covering would lead to some spectacular rallies, these days it ain't necessarily so. Yes - there will be SOME short covering on the ASX - perhaps that what we're starting to see with LYC right now. But there is no way that 170 million outstanding shorts can be covered on the ASX in a few days, let alone a few hours, without giving the game away.

So the shorters may well decide to cover using Chi-X, and for the REALLY large volumes, via dark pools. Presumably they would buy shares from another insto that bought them even cheaper (eg Morgan Stanley) so that the buyer and seller both make their profits. And the ASX and retail punters at large - i.e. You and me - don't see ANY of that happening...!

Just a couple of possibilities to consider.

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