THE Australian Securities Exchange is demanding a review of stock trading rules amid evidence that hedge funds are "borrowing" shares from superannuation funds to force down prices, a practice that is mauling retirement savings.
The call follows a volatile month on the share market, in which fluctuations have been magnified by short trading, a controversial technique used by traders to make profits out of a falling market.
Traders, such as hedge funds that exist to exploit market anomalies and volatility, have been borrowing large parcels of stock, mainly from superannuation funds.
Australia's $1.1 trillion superannuation industry warehouses its shares with "custodian" companies, which often offer a discount for the service if the fund allows the stock to be lent to third parties.
Borrowed shares can be used to take long or short positions - betting shares will rise or fall - or to manipulate voting at companies' annual meetings. The transactions are exempt from capital gains tax. Other countries allow stock lending but do not have the same tax exemptions available in Australia.
Stock lending cannot be traced and the ASX, which runs and regulates the Australian Stock Exchange and Sydney Futures Exchange, admits it has no idea what proportion of shares have been "lent" to traders.
David Bryant, group executive of investments at Australian Unity, which has $6.4 billion in funds under management, likened the practice to leaving a car in a car park, which lends it to local hooligans who return it damaged. The owner is left with the mess. "It really is that simple," he said. "And if you put margin lending into the mix the practice adds to margin calls."
A fund that wants to engage in short selling borrows a share and then sells it in the hope of repaying the loan of the shares by buying them back cheaper at a later date. The practice can put downward pressure on shares, triggering margin calls for investors who have borrowed to buy stock, potentially driving shares even lower.
ASX chief Rob Elstone said yesterday short selling was not the issue, but the related stock lending activity. "It lacks transparency and, depending upon how many links there are in the stock-lending chain, that has the potential to raise systematic risk issues," he said.
Paul Fiani, the fund manager who played a big role in stopping hedge funds taking over Qantas last year, said: "Investors get paid a small fee to lend out their securities to short sellers, who then proceed to destroy the value of their underlying securities that the investor owns."
Mr Fiani, who runs Integrity Investment Management in Sydney, said the ASX was a huge beneficiary of hedge fund and margin lending activity, all of which serves to increase the turnover in the market. "I would like to see all regulatory roles moved out of the ASX, so that the ASX can focus on achieving better returns for its shareholders, without distraction from the regulatory responsibilities that often conflict with this objective."
Other fund managers, including Platypus chief investment officer Don Williams, said share lending should be curbed and regulated. He said stocks outside the top 100, which are liquid and more difficult to manipulate, should not be available for share lending.
A spokesman for the Association of Superannuation Funds of Australia spokesman said it could not comment "on investment practices of individual superannuation funds".
"We are very happy to engage in dialogue with the ASX on this matter on behalf of our members if there are concerns about current market practices," he said.
http://www.theaustralian.news.com.au
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