Whether or not you morally agree with shorting the market during a crisis, it happens. But have brokers seen an increase in shorting the market during the Coronavirus pandemic?
The FCA has not banned shorting UK stocks, although the European have banned the shorting of many main market stocks. There is also a great article on the FT, about how short-selling bans don’t work.
In an article in the Journal of Finance titles Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis ALESSANDRO BEBER and MARCO PAGANO said:
Our results indicate that the short-selling bans imposed during the crisis are associated with a statistically and economically significant liquidity disruption, that is, with an increase in bid-ask spreads and in the Amihud illiquidity indicator, controlling for other variables. In contrast, the obligation to disclose short sales is associated with a significant improvement in market liquidity.
Shorting stocks, indices, and commodities is selling them first in the hope that prices will fall so you can buy them back later.
We’ve covered the in and outs of how to short via CFDs and spread bets here, but unless you are a massive fund, it easiest to do it through a CFD broker or a spread betting broker. You can also find out what the big hedge funds are shorting if you are stuck for ideas.
In a crisis such as 9/11 or COVID-19 you will have had to be short prior to the pandemic to have captured the major moves. For example, in his book, Winning Against the Odds: My Life in Gambling and Politics, IG Group founder Stuart Wheeler, said he made a huge amount of money being short the market on 9/11, although, this was a position he had before the attack.
There are two reasons to be short the market.
- You are a speculator and want to make money on new positions because you think the market will go down.
- You have a long-only portfolio and want to protect it from the market dropping.
There are a few ways short the market:
But have brokers seen traders going short the market during the COVID-19 Pandemic?
Adam Blemings – Head of Trading at IG Group said:
We have seen an increase in business as you would expect. Some of this will be clients shorting, either to hedge portfolio’s elsewhere, or because they believe the market is going to fall further, or often both of the above.
Looking at the FTSE on IG’s website you can see that 54% of their clients are short the market at the moment.
The thing about sentiment though is that it is generally can be a contrarian leading indicator. If everyone is doing it, chances are the buying or selling will run out of steam and reverse at some point.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.