UK shorting data plan cautiously welcomed

Hedge fund practitioners have cautiously welcomed attempts by UK regulator, the Financial Services Authoirt (FSA) to provide more information on shorting.

The regulator proposes UK securities settlement system Crestco will from the summer release monthly data on securities with the highest proportion of trades not settling by the required date.

This change is intended to help market participants spot problems developing in particular stocks, and settlement failures to act as a proxy for the stocks being most heavily shorted in the market.

In addition the London Stock Exchange and virt-x will notify their members of securities subject to significant settlement delays. The FSA is discussing with exchanges and trade associations how best to warn those seeking to trade in the securities in question of settlement delays.

The LSE has also said it is considering shortening the buy-in timeframe for illiquid securities experiencing a significant build-up in settlement delays.

The resulting increased transparency has been welcomed in helping investors feel more secure about hedge funds. But the usefulness of the information has been questioned, and even criticised as possibly misleading.

Ravi Anand, corporate finance director at New Star Asset Management, said the method of collecting information failed to give accurate data on naked shorts. It ignores pair trading and quant-based systems, he said, which balance shorts with long positions, so the view the information gives could be distorted.

'It is giving a very top-down view. You need to understand why the shorting is taking place,' Anand said. 'It may provide some information that will interest long-only managers, but perhaps it could be open to misinterpretation. If they are going to put this information out they must explain its limitations.'

Chris Jones, director, alternative investment strategies, at IO Investors, praised the FSA's measure for making hedge funds more attractive to investors.

'Demystifying hedge funds can only be positive for the asset class,' he said. But he also questioned the data's usefulness, saying it would not give a true picture of shorting activity.