The Bear Game

In the UK, the history of stock borrowing and lending has veered from being a well regulated, secure winner for all parts of the finance industry into an open season that is almost a free-for-all for regulated business. This has been instrumental in the creation of a much greater risk in short selling.

I will be presenting a potted history of stock Lending and borrowing from 1985 to today at the next Post Trade Forum debate, ‘Should Short Selling be banned?’ on the 22nd February at the London Stock Exchange. The benefits of short selling in part are supported by the stock lending/borrowing business but are not driven by it. That’s important to realise!

Stock borrowing provides important revenues to Institutional investors who lend and significant revenue to the treasury via manufactured dividends. This should be acknowledged when any ban on short selling is discussed. So short selling is not a simple business where all the market troubles and impacts on the economy can be blamed.

Stock borrowing also has an important role to play in trade financing that if prevented would have a knock on impact on spreads in the market and the price of investment.

In 1985 as Manager of the stock borrowing business, in a Jobbing Firm (now known as a Market Maker) I was actively involved in the creation of revenues that financed the trading positions of the Jobbing book. Today it’s quite different, with all firms able to take a role in stock borrowing and lending, but without the central control that the Bank of England had back then.

Many other differences will be outlined, which should be considered when debating whether or not short selling should be banned or more highly regulated. This emotive topic should make for a stimulating and enlightening debate, which is sure to also increase everyone’s understanding of this very important feature for stock markets.