Shorting The Market

Traders were circulating a disturbing rumor in the days following the World Trade Center

attack on September 11: Osama bin Laden and his Al Qaeda network – blamed for the unmerciful act – had earlier shorted some airline and insurance stocks. It was a shocking thought, but was it true? It would take strong evidence to make a convincing case. Where would the trail begin and end? That problem was not at issue in a study of short sellers in the aftermath of 9/11. These short sellers basically had a positive impact on the market, the study concluded. "[Shortsellers] were returning securities en masse to banks and therefore had to be buying in order to make those returns," according to Ed Blount, executive director of The Astec Group, an investment consultancy based in New York. The debate over short selling, an activity which is at record levels, is complicated. So it is important to separate fact from fiction, especially during a period of market turmoil and international crisis. There are many established facts, thankfully, in this month's cover stories, Shorting The Market.

Blount, for instance, told contributing editor Nina Mehta that short sellers were "a kind of benevolent force" in the post-9/11 period. Indeed, several pros say short selling has propelled some market rallies. Unsurprisingly, many short sellers had a great year in 2002, racking up gains of some 30 percent. Still, short selling is largely a province of the pros – and for good reason. It is sometimes a sinister game played by the sharks, though there are many ethical pros and good funds operating in the arena. The efforts to attract retail investors into short selling funds – which usually start with $5,000 minimums – have had mixed results. Some of these funds actually had losses in recent months.

Mehta, a New York based financial writer, was joined by Tom Taulli in writing our cover stories. Taulli is the author of The StreetSmart Guide to Short Selling (McGraw-Hill, 2002). Taulli noted how some hedge fund managers, playing fast and loose with the rules, may have engaged in questionable short sales in the stock of financially troubled United Airlines (NYSE:UAL). UAL stock had reported short sales of 24 million shares in November. Was there collusion among some funds and clearing firms that were engaged in the short sales of UAL? Read Taulli's report.

Elsewhere there are two important opinion pieces – penned by trading executives Duncan Niederauer of Goldman Sachs, and Joe Lombard of Wave Securities. They write separately about ECNs and market structure. The issues raised may blow a big hole in your golashes. Finally, since it's January, may I wish you a happy and peaceful New Year. I thank our publisher, Kenneth Heath, for helping make our ringside view of a dynamic industry both accessible and exciting.

John A. Byrne