Wednesday, March 26, 2008

Babcock and Brown Combat Shorting

I noticed yesterday that Babcock and Brown had set up a new prime broking arrangement with Deutsche Bank. I didn't look into the details though. Apparently it avoids margin calls and does not allow their stock to be lent to other parties (for short-selling). Short-selling is currently very controversial in Australia as in some cases short-selling has pushed stock prices down resulting in margin calls to directors or companies that results in their stock being sold in a cascade effect. This affected Allco and ABC Learning Centres and rumours were that Babcock and Brown was also being targeted. In the US, unless you are a market-maker you have to borrow stock first before short-selling it. Naked short-selling where stock is not borrowed is not approved though ti goes on. In Australia things are reversed. The ASX has a list of approved stocks that can be short-sold - nakedly short sold. You don't need to borrow the stock if it is on the list. This is the only sort of shorting that is reported to the exchange. On the other hand a market has developed where stock is borrowed and short-sold. The reason is that only the biggest companies by capitalization are on the approved naked shorting list. Borrowing to sell short is not regulated and so no-one knows the actual short-interest in smaller Australian stocks and it seems many people are only just waking up to the fact that this going on.

Anyway, I hope this move helps the stock prices of Babcock and Brown related stocks such as EBB.

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