Stockwatch: loss of intelligence behind short selling

Changes to the disclosure rules for short selling could compromise stock market transparency to the detriment of investors, argues analyst Edmond Jackson. Here’s what’s going on.

22nd April 2025 12:36

Edmond Jackson from interactive investor

My company analysis pieces sometimes include short-selling data, noting the actions of astute hedge funds, which can be useful to weigh downside risk – or at least ask questions about why any capable trader might borrow and sell shares, which is risky in itself.

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So, it is disappointing how the Financial Conduct Authority (FCA) appears to be acting in the interests of funds that prefer anonymity. The current regime where public disclosure is required of funds that short over 0.5% of a company’s issued share capital, and their subsequent trades until back below 0.5%, is to be replaced by all short sellers over 0.1% reporting this to the FCA, which will consolidate the data to publish a total short position.

I believe this will improve transparency of early stage shorting, especially the larger the company where there could be material individual short positions below 0.5%. But it will no longer be possible to see what the most capable short sellers are doing. Nor would companies know who is undertaking this, to reach out, which could be damaging, say, if a share issue is planned (a lower share price raises the cost of equity capital.)

Weak justification from the FCA, which is following the US

Apparently, some hedge funds dislike attracting imitators. They also become exposed to a “short squeeze” where traders on the buy side attempt to force short sellers to close, extending a bounce.

But if short sellers have read company fundamentals broadly right, then market technical issues like this are irrelevant. I notice true professionals such as the hedge fund Marshall Wace do not flinch from conviction in bear market rallies.

The FCA proposed the change last January, saying it will pave the way for the UK to repeal and replace the regime implemented while the UK was in the European Union; then “onshored” it into UK law after we left the EU. Also, a change to a “lighter touch” regime was proposed by the previous government and Labour has continued with it.

There is an implied sense of creating a level playing field with the US. Ironically, the matter has only come to wider attention because President Trump is complaining about a UK-based hedge fund, Qube Research & Technologies, opening a £75 million equivalent short on Trump Media & Technology Group Corp (NASDAQ:DJT).

Trump is thus benefiting from the regime adopted by the EU – an institution he describes as “founded in order to screw the US” – otherwise he would not know about Qube or be demanding the US Securities and Exchange Commission investigate it, once we are aligned with the US.

Presumably Labour sees this as a necessary part of its “growth” agenda, quite like how consumer compensation should be mitigated in the car finance commissions disclosure row.

Qube’s short became public because of a filing to Germany’s federal Gazette Bundesanzeiger, triggering media interest over Easter.

On the buy side, shareholder identities are disclosed

All holders over 3.0% of a company’s issued share capital become identified, which an institution or indeed corporate predator could say compromises their interests if quietly accumulating a more meaningful stake.

Yet hedge funds tend (in client newsletters) to explain and justify their actions to clients, including the short book. Those closest to the market such as hedge funds’ prime brokers, will also have a good sense of what is going on. Interesting trades tend to get known and, given a bristling social media, we may end up with more rumours than facts about short selling.

On Qube’s UK short trades, sites such as www.shorttracker.co.uk and www.investegate.co.uk make it possible to see it has slightly trimmed its 1.29% short in fashion retailer Debenhams Group (LSE:DEBS) but raised its short in veterinary services CVS Group (LSE:CVSG) 0.10% to 1.10%. Short trades have also been raised in property investment group Great Portland Estates (LSE:GPE) GPE 0.11% to 0.61% and uranium group Yellow Cake Ordinary Shares (LSE:YCA) up 0.10% to 1.04%, while a 0.55% short in commercial property group Regional REIT Ord (LSE:RGL) is stable at 0.55%.

Short selling is a risky, requiring strong reasons

Shares must be borrowed, usually off long-term institutional holders who then benefit from lending fees while also retaining the right to dividends the short seller has to pay.

While long positions have a maximum loss of 100%, it is theoretically infinite on a short if the business turns around, and could be a big multiple if an attractive takeover gets recommended well above a low for the shares.

Rather than dispute short selling as something to be outlawed, it intrigues me as to what justification the traders involved have, this all aiding efficient prices.

Mind that sometimes, and especially with big-cap shares such as Sainsbury (J) (LSE:SBRY) (currently the second most-shorted share on the London market with 6.4% loaned out), some institutions may be using a highly liquid share as part of hedging the market.

For example, BlackRock – the world’s biggest investment manager – is short Sainsbury’s by 1.05% and Marshall Wace by 0.91%, albeit increasing. The total disclosed short position on Sainsbury’s has risen from 2.1% on 1 January to near 6.4% currently.

While the trend decreased from 13% in December 2014 in a volatile-downward trend, there has been a definite jump this year after short selling was broadly constant from early 2022 to 2024.

Sainsbury’s did, however, close up 3.5% at 257p after last Thursday’s annual results to 1 March 2025, so unless a supermarket price war manifests to compromise the dividend behind a near 6% yield currently, I am inclined more towards “hold” than “sell” – also respecting the price is currently around tangible book value.

Media’s ability to hold short sellers to account will be lost

A prime example was the 2008 crisis when Bradford & Bingley plunged amid aggressive shorting by Odey Asset Management among others. This raised the cost of a rescue rights issue, which anyway became “money down the drain” when the government promptly nationalised B&B.

The media tackled founder Crispin Odey as to his firm’s actions and, like in other previous cases such as Home Retail Group (the Argos owner now part of Sainsbury’s) and Tullow Oil (LSE:TLW), he was open about his rationale. It was thus a prominent red flag alongside B&B’s £400 million rights issue, and indeed the underwriters had to take up a significant portion.

A hint of added potential in oversold shares

Watching short-selling data can also help identify when a fall may have gone too far, and also why a share may be recovering despite no news from the company. That’s because short sellers start to buy back stock, sensing they should not push their luck too far and closing out is best done in a gloomy market.

Overall, I prefer the current regime which makes it possible to judge the intelligence behind short selling – if one is aware of funds’ track records – although I concede that publishing an agglomeration of trades over 0.1% of a company’s share capital would in some situations be more transparent.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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