Is insider trading illegal in India
The case shakes the entire financial market. At least that is how the financial regulator Bafin justified the fact that it forbade speculation on a falling course of Wirecard. The payment service provider's share has been going wild since January 30th. There reported Financial Times for the first time about alleged fraud at Wirecard in Singapore. The technical term for the speculation is "short sales". They always come into the public eye when there is a serious problem somewhere. But when it comes to knowledge about short sales, there is a great void in Germany. Are They Really That Bad? What is actually behind the term?
A Wirecard manager in Singapore is said to have manipulated numbers to make the company's business in Asia appear bigger than it is, wrote the British business newspaper in three reports. In doing so, it relies on internal documents. Wirecard rejects the allegations that the investigation by an independent law firm has not yet revealed anything. The final report should come in about four weeks. The Wirecard share lost up to 40 percent because of the reports. On February 18, the Bafin surprised with the short sale ban, which it justified with a "serious threat to market confidence in Germany" and "massive uncertainties in the financial markets". The Munich public prosecutor's office is investigating possible market manipulation. Most recently there were dubious reports about an alleged informant who wanted money from Wirecard and threatened to pass on negative information to the media.
A look at the history books shows: Short selling has been an issue in stock trading since the beginning of all trading days. Speculators were already targeting what was probably the first ever share, the Dutch East India Company. Above all, the company did good business on the spice route to back India. At the beginning of the 17th century, however, one of the company's directors, Isaac le Maire, had to leave the company in a dispute. Le Maire was obviously looking for revenge, because in 1609 he teamed up with other business people to bet together on a falling share price. After that he only wanted one thing: to depress the share price. According to historians, the businessmen were spreading rumors that the Dutch East India Company might be dealing with English pirates - and besides, the French were now also rushing into the business. When the share price fell, the company pricked up its ears and got wind of the speculators. She complained, and the stock market temporarily banned such deals. Even other companies were skeptical about this and were against a ban: If the company had no problems, the rumors would not fall on fertile ground either. VICTOR GOJDKA
How exactly does short selling work?
Anyone who sells a stock short assumes that its price will fall. He borrows shares for a fee and sells them on the stock exchange. If the price then falls, he buys the shares back at a lower price and gives them back. The price loss minus the rental fee is his profit. But if the share rises, it makes a loss. He then has to buy back the share at a higher price.
Who are the distributors?
Short sellers need to find a trading partner who will lend them the securities. So that you don't have to phone ten fund companies, ask your securities dealer, usually special departments of major banks such as Credit Suisse, Morgan Stanley or Deutsche Bank. These securities dealers are like middlemen: They are networked with large fund companies and asset managers. They can decide whether or not to lend shares to a potential short seller through the securities dealer's middleman. It is usually not a problem to find enough stocks to borrow.
In autumn 2008, the VW share rose dramatically to more than 1000 euros within a few days. Porsche wanted to take over the much larger group and had previously secretly secured 75 percent of all VW shares. Since the state of Lower Saxony owned 20 percent, only five percent were freely tradable. When the surprising news became known, little supply met high demand: the price shot up. Short sales acted like a fire accelerator. The technical term for this is "short squeeze", which means that short sellers are squashed. The mechanism works like this: If a price rises sharply, institutions that have lent out the shares demand them back from the short sellers because they want to sell the shares themselves in order to secure profits. The short sellers are forced to buy the shares on the stock exchange, whatever the price, in order to meet their obligation. This drives the price further up. Short sellers lost a lot of money back then. Among them was the Swabian entrepreneur Adolf Merckle, who committed suicide in January 2009. However, the takeover of VW by Porsche failed: Porsche got into trouble itself and was taken over by VW. HARALD FREIBERGER
What does the loan cost?
There is a rule of thumb for prices: If a short seller wants to borrow the share of a large DAX company such as Siemens or SAP for a year, it will cost him around 0.4 percent of the share price. If many short sellers want to borrow shares in the same company, the lending fee increases - sometimes to five percent per year. "Borrowing Wirecard shares currently costs around 3.25 percent a year," says Ihor Dusaniwsky from data provider S3 Partners.
Who are the short sellers?
Most of the time, so-called hedge funds are short selling. These are funds especially for large investors who want to make a lot of returns with particularly sophisticated trading techniques. Some hedge funds are specifically looking for companies that, for example, report incorrectly or cover up environmental scandals. They research for months and then try to make money with this knowledge by betting on falling prices. In practice, hedge funds bet an average of about 40 days on falling prices at a company, according to researchers who have dealt intensively with the topic. Many in the financial community had previously suspected that the short sellers would only bet a few days.
Short sellers are not always dubious figures who cheat on their deals. So-called activist short sellers target companies where something is in the bush - and thus bring clarity for all investors. During their research on the US flooring manufacturer Lumber Liquidation, the employees of the hedge fund Kase Capital Management came across an astonishing fact in 2013: The manufacturer's profit margin was much better than that of many competitors. The experts could not explain it - and tried to fathom the mystery. At first they suspected that the society is illegally clearing forests in Siberia. Then an informant answered that things were much worse. The flooring company sold Chinese floor coverings that were contaminated with the carcinogenic substance formaldehyde. The hedge fund analyzed these problems in several research reports. When a television show finally also made allegations, the company's stock slumped 25 percent the next day. Because of the inconsistencies, the company later had to pay a fine of $ 13 million. The hedge fund brought it to light. VICTOR GOJDKA
Are Short Selling Just For Profit?
No, many fund managers simply want to use it to hedge share purchases (in technical jargon someone goes "long" who buys a share and hopes for a rising price, a short seller goes "short"). An example: It may be that a fund manager is generally positive when it comes to German stocks. That's why he bought a lot of German titles. At the same time, however, he fears that the trade dispute could boil up and prices will suffer from export values - he wants to insure himself against this. So, on the one hand, he buys stocks that he hopes for price increases. With other stocks he speculates with a short sale on falling prices. This is how he balances his risk. Such hedging transactions play a major role with professional investors. "Without short sales, the functioning of the capital markets would no longer be possible," says Christian Schlag from the SAFE research center at the Goethe University in Frankfurt.
Isn't short selling all that bad?
No, because they have other positive side effects as well. "With short sales, investors can express a negative opinion about a company," says finance professor Schlag. That is an important economic function in price formation. Otherwise, this is only possible by selling a share, but you have to buy it beforehand. The rise and fall of prices on the capital markets is always a consequence of the sum of opinions, whether positive or negative. The negative opinion that a stock is overvalued is just as valuable as a positive one. Short sales therefore ensure efficient pricing on the stock exchanges. In addition, stocks are traded more frequently as a result of the short sales than if they were only slumbering in the books of an investment company. In technical jargon it is said that the shares are becoming "more liquid". And experts know: The more frequently a share is traded, the more precisely stockbrokers can determine its price, the smaller the differences between the buying and selling prices are - and that benefits every private investor.
What are negative effects?
Selling short can also have a negative effect if the investor has manipulative or fraudulent intent. It happened again and again that hedge funds that had previously positioned themselves spread negative news and then profited from the price decline. If this news is incorrect, this is price manipulation and is prohibited. The offense of insider trading also appears frequently in connection with short selling. So if someone who has exclusive negative information bets in advance on the price decline of a stock or informs others. But this does not have to be automatically punishable. In particular, it is often difficult to prove manipulation and / or insider trading.
And how is the Wirecard case to be assessed now?
That depends above all on whether the Financial Times' allegations turn out to be correct in the end. If they are correct, it should not be market manipulation, but at most insider trading - for example, if it turns out that short sellers have been informed beforehand that a negative report is coming. In any case, an investor who has a negative opinion about a company is not prohibited from expressing this in the form of short sales. All in all, an instrument is the same as with many things in everyday life, such as a knife: They are basically useful, but can be misused.
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