The massive profits stripped from the market represent a...

The massive profits stripped from the market represent a re-distribution of wealth from owners of shares who are by and large the ‘little people represented by mums and dads, Australian workers, overseas pension funds, small private investors etc. with their funds under management, to the corporate sector represented by hedge funds and the investment banks. The redistribution necessarily requires high levels of collusion between alpha fund managers and custodians, and a preparedness to disadvantage one class of investor for the exclusive benefit of others. The entire process is focussed on benefitting from the destruction of wealth with immense damage done to the market, the Australian economy and the national interest as foreign ownership over Australian assets is made easier through severe undervaluations.Pooled investments or managed funds with the cash to buy shares that are sold short into the market are also likely to be managed by alpha fund managers. Thanks to compulsory superannuation disposable cash is rolling in on a daily basis. The former Labor Government’s response to dwindling superannuation returns has been to bolster the ‘wellspring of cash’ through increased contributions. The shares sold short are willingly provided by the custody banks to alpha fund managers through securities lending arrangements. It is a cosy arrangement, with benefits for all if there are any profit sharing arrangements or if favours are reciprocated on a stock-by-stock basis. After all, there are precedents for collusion.From a registry perspective, institutions (representing the holdings of custodians) are lending shares for short selling to other institutions (to be sold by alpha fund managers) and other institutions are buying the shares sold short (also directed by alpha fund managers). The arrangement explains why the register doesn’t reflect changes to large increases or decreases in open short positions simply because ownership over the shares is retained by institutions as a group.It goes a long way to explaining why short covering can take place without price impact, as the holdings are re-distributed agreeably off-market and without true price discovery. The arrangement necessarily involves high levels of co-operation (i.e., collusion) with pricing arrangements for off-market exchanges of shares somewhat arbitrary and/or artificial. As such the arrangement is highly manipulative.The big losers in the exercise are the owners of shares with funds under management and the winners are the hedge funds and investment banks who are responsible for the short selling. Also disadvantaged are the contributors to the cash reserves used by alpha managers to purchase the shares sold short into the market. By colluding with the short sellers in facilitating covering off market and without fair price discovery, it means that they miss out on the price appreciation that would normally occur if short sellers had to go back to the market to re-purchase the shares. When their shares are made available for covering to take place off-market, and without proper price discovery, it means that client money is again being sacrificed for the benefit of those affiliates who sold short.If the short sellers were forced into the market to cover, (i.e. to buy back the shares sold short) then their clients would stand to reap strong profits. But it rarely, if ever, happens judging by the number of charts of ASX 200 companies that show negligible price responses as large volumes of short positions are reduced. (Refer Appendix 2)Another snippet of interest: