Transparency is king
06 January 2018
David Lewis of FIS discusses how transparency can contribute to bringing efficiency and safety to a financial market
Image: Shutterstock
We live in an increasingly transparent world. Few areas of life, whether personal or business, are not exposed in facts that are liberally, and often instantly, distributed across multiple media, worldwide. Data latency is now unrecognisable compared with just a few years ago, let alone a couple of hundred years ago. Then, trading advantages could be gained by having the fastest sailing ship, vessels that not only brought goods but information and news about harvest performance, political regimes and any scrap of information that might affect the value or supply of traded goods.
Now, as we all experience in our daily lives, we can gather news and information on any subject, from pretty much anywhere in the world and almost instantaneously to our pocket devices. But what if it is wrong, or misleading? Much has been covered in the media over the last couple of years under the new phrase of “fake news”. Examples abound of seemingly obvious fake news items being absorbed as real and affecting everything from share prices to (allegedly) major elections. In some cases, it doesn’t even take news to move markets. Witness the effect that a recent tweet of one person’s opinion of the new version of the Snapchat app had on Snap, the company that owns the once ubiquitous app. Kylie Jenner, half-sister of a Kardashian, posted that she was “sooo (sic) over Snapchat” and the company’s shares fell 8 percent to $17, their initial public offering price, bringing the market cap down by $1.3 billion.
It is doubtful, perhaps, that if the same person tweeted her dislike of, say, a global oil company or a steel manufacturer, it would suffer the same fate, but news doesn’t have to be false, or from social influencers, to be misleading. Short interest, a common theme for FIS articles in Securities Lending Times, is rising rapidly as a major component or input into trading decision making systems. At Astec Analytics we have been doing some incredibly interesting work with algorithmic funds, research houses and alternative data aggregators. Our combined research has identified genuine alpha generation using short interest activity as a leading indicator, which is multiplied in strength when combined with other related and, at times, seemingly unrelated data models. Perhaps counterintuitively, some of the strongest correlations with share price performance was related to long funds, rather than short sold positions that might naturally be expected to fit more closely.
Recent articles in the press have highlighted large short exposures held by some hedge funds, partly because the allegedly nefarious behavior of short sellers, and, by extension, securities lenders, rarely fails to get a headline, but also partly because they are pushed into the limelight as indicators of market sentiment. For example, a recent article about the substantial short positions, totaling some $22 billion, held by Bridgewater, one of the world’s largest hedge funds, highlighted the lack of clear understanding available despite the transparency that such public data is supposed to bring.
In several jurisdictions across the world, there are market disclosure rules typically making public the details of positions exceeding 0.5 percent of the issued share capital of given equities. Countries with such rules include Korea, Japan, and the UK, while others such as Australia and Canada just report aggregate positions without naming the funds behind them. The practice of naming funds may be behind some of the shortcomings in such disclosures. While there are many instances in the past where a very public and intentional disclosure of short exposures has been made (Muddy Waters and Gotham Research spring to mind), allegedly to further the markets interest and analysis of the target companies, most funds protect their anonymity at all possible, and, of course, legal costs.
In order to limit public disclosure in those jurisdictions where it is mandatory, all that the funds have to do is stay beneath the disclosure minimums. Half of one percent of a company’s issued share capital allows for reasonably large positions to be accumulated without them being made public. This can, of course, create misleading data.
Last December, shares in the Germany-based company, Steinhoff International Holdings, (SNHG), which has a range of interests from household goods retailing to logistics and car rental under the Hertz brand, collapsed as it admitted accounting irregularities following a long examination by German tax investigators. The shares fell from around €3.45 to less than €0.60 almost overnight, trending down further to around €0.40, yet not a single public disclosure had been made by the German regulators. Short interest has long been known as the “canary in the coal mine”, there to warn investors of potential price changing events, helping ensure that shares do not become overvalued and companies do not benefit from capital that could be better employed elsewhere. Yet, for Steinhoff, no such public warning came.
Securities finance data, however, when used as a proxy for short interest can be very compelling indeed. The graph below shows the level of borrowing in Steinhoff shares and the cost of borrowing those shares, indexed to 100 as of 1 January 2017. The sudden and very clear jump in both lines at the start of December is after the announcement was made and is made up of other short sellers jumping in after the fact. Somewhat diluted by the jump to an indexed rate of 1,350 for the volume borrowed, is the 540-point rise in volume that occurred before the announcement.
The adage that a little knowledge is a dangerous thing is not appropriate in the case of Steinhoff as, for much of the market, there was no knowledge at all. However, it could be used much more accurately when considering the public disclosure of such data, the absence of which may well have led investors to place capital into Steinhoff, when they perhaps should not have. Comprehensive and timely data is what is needed for efficient markets, whether that is the lending and borrowing of securities at the right rate, or the selling and buying of securities at the right price. Transparency can contribute to bringing efficiency and, indeed, safety, to a financial market, but if Steinhoff, and other such examples prove anything, it should be all or nothing.
Now, as we all experience in our daily lives, we can gather news and information on any subject, from pretty much anywhere in the world and almost instantaneously to our pocket devices. But what if it is wrong, or misleading? Much has been covered in the media over the last couple of years under the new phrase of “fake news”. Examples abound of seemingly obvious fake news items being absorbed as real and affecting everything from share prices to (allegedly) major elections. In some cases, it doesn’t even take news to move markets. Witness the effect that a recent tweet of one person’s opinion of the new version of the Snapchat app had on Snap, the company that owns the once ubiquitous app. Kylie Jenner, half-sister of a Kardashian, posted that she was “sooo (sic) over Snapchat” and the company’s shares fell 8 percent to $17, their initial public offering price, bringing the market cap down by $1.3 billion.
It is doubtful, perhaps, that if the same person tweeted her dislike of, say, a global oil company or a steel manufacturer, it would suffer the same fate, but news doesn’t have to be false, or from social influencers, to be misleading. Short interest, a common theme for FIS articles in Securities Lending Times, is rising rapidly as a major component or input into trading decision making systems. At Astec Analytics we have been doing some incredibly interesting work with algorithmic funds, research houses and alternative data aggregators. Our combined research has identified genuine alpha generation using short interest activity as a leading indicator, which is multiplied in strength when combined with other related and, at times, seemingly unrelated data models. Perhaps counterintuitively, some of the strongest correlations with share price performance was related to long funds, rather than short sold positions that might naturally be expected to fit more closely.
Recent articles in the press have highlighted large short exposures held by some hedge funds, partly because the allegedly nefarious behavior of short sellers, and, by extension, securities lenders, rarely fails to get a headline, but also partly because they are pushed into the limelight as indicators of market sentiment. For example, a recent article about the substantial short positions, totaling some $22 billion, held by Bridgewater, one of the world’s largest hedge funds, highlighted the lack of clear understanding available despite the transparency that such public data is supposed to bring.
In several jurisdictions across the world, there are market disclosure rules typically making public the details of positions exceeding 0.5 percent of the issued share capital of given equities. Countries with such rules include Korea, Japan, and the UK, while others such as Australia and Canada just report aggregate positions without naming the funds behind them. The practice of naming funds may be behind some of the shortcomings in such disclosures. While there are many instances in the past where a very public and intentional disclosure of short exposures has been made (Muddy Waters and Gotham Research spring to mind), allegedly to further the markets interest and analysis of the target companies, most funds protect their anonymity at all possible, and, of course, legal costs.
In order to limit public disclosure in those jurisdictions where it is mandatory, all that the funds have to do is stay beneath the disclosure minimums. Half of one percent of a company’s issued share capital allows for reasonably large positions to be accumulated without them being made public. This can, of course, create misleading data.
Last December, shares in the Germany-based company, Steinhoff International Holdings, (SNHG), which has a range of interests from household goods retailing to logistics and car rental under the Hertz brand, collapsed as it admitted accounting irregularities following a long examination by German tax investigators. The shares fell from around €3.45 to less than €0.60 almost overnight, trending down further to around €0.40, yet not a single public disclosure had been made by the German regulators. Short interest has long been known as the “canary in the coal mine”, there to warn investors of potential price changing events, helping ensure that shares do not become overvalued and companies do not benefit from capital that could be better employed elsewhere. Yet, for Steinhoff, no such public warning came.
Securities finance data, however, when used as a proxy for short interest can be very compelling indeed. The graph below shows the level of borrowing in Steinhoff shares and the cost of borrowing those shares, indexed to 100 as of 1 January 2017. The sudden and very clear jump in both lines at the start of December is after the announcement was made and is made up of other short sellers jumping in after the fact. Somewhat diluted by the jump to an indexed rate of 1,350 for the volume borrowed, is the 540-point rise in volume that occurred before the announcement.
The adage that a little knowledge is a dangerous thing is not appropriate in the case of Steinhoff as, for much of the market, there was no knowledge at all. However, it could be used much more accurately when considering the public disclosure of such data, the absence of which may well have led investors to place capital into Steinhoff, when they perhaps should not have. Comprehensive and timely data is what is needed for efficient markets, whether that is the lending and borrowing of securities at the right rate, or the selling and buying of securities at the right price. Transparency can contribute to bringing efficiency and, indeed, safety, to a financial market, but if Steinhoff, and other such examples prove anything, it should be all or nothing.
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