In the first article in this series of publications, we discussed the possibility of a “short squeeze” contributing to the meteoric rise of the stock price of GameStop Corp. (NYSE:GME) (GameStop).
However, when placed against the backdrop of the Australian regulatory landscape, a GameStop-style “short squeeze” event is comparatively unlikely to occur in Australia for a number of reasons, including:
- the regulatory supervision of the Australian corporate regulator (ASIC) in respect of Australian internet discussion sites (refer to article: Can’t Stop, Won’t Stop…GameStop? Part one: Securities regulation of Australian internet discussion sites);
- the monitoring and surveillance activities of the ASX targeted at identifying abnormal trading (refer to article: Don’t Hate the Player, Hate the GameStop (NYSE:GME) — Part two: A case of mistaken identity?);
- the smaller size of the Australian capital markets in general and the limited number of companies that are able to practically be sold short;
- the higher costs of entry/brokerage in Australia, compared to the free brokerage methods available in the United States (meaning that the volume of retail investment is likely to be far less); and
- a much smaller pool of available leveraged derivatives (options).
With that said, short selling is permitted in Australia (subject to a number of rules and exceptions).
In this article (the third of the series), Michele Muscillo and Luke Dawson discuss the regulatory mechanisms currently in place in Australia regarding short selling.
Short selling at its most basic level is a person selling a share in a company that they do not own, with a view to repurchasing a share in the same company at a later date, at a lower price. The concept essentially permits investors to bet on the decline of a company’s share price. The investor pockets the difference between the higher price at which the share was initially sold and the lower price that the short seller repurchases a share in the same company at close to the trade out (less any fee owed under the relevant securities lending arrangement).
There are two broad categories of short selling:
- covered: where the person executing the short sale has an existing securities lending arrangement with another person, which vests in them a presently exercisable and unconditional right to vest the shares in the buyer at the time of sale (essentially, the short seller has borrowed the share from another person before they have sold it); and
- naked: where the person executing the short sale does not have a securities lending arrangement in place in respect of the shares.
Under the Corporations Act 2001 (Cth) covered short selling is permitted, while naked short selling is specifically prohibited under section 1020B(2) (subject to a number of limited exceptions). Covered short selling is permitted as it is perceived to give rise to price discovery and liquidity in the market without the same level of settlement failure risk that exists in naked short selling.
If a short seller makes a sale on an Australian licensed market, that seller may, depending on the value or size of the sale, be required to comply with the two short selling reporting requirements:
- short sale transaction reporting (i.e. the reporting of daily volumes of securities that are short sold in the market – required to generally be provided by 9am on the next trading day); and
- short position reporting (i.e. if a seller, acting in a particular capacity, has an obligation to deliver 5,000 shares and, acting in the same capacity, has only 2,000 shares, then their short position is 3,000 shares).
The Australian Government has described positional reporting as providing an indication of both the bearish sentiment within a particular stock at any point in time, and the overhang in a stock that will need to be covered at some point by short sellers purchasing shares (referred to as the short ratio). ASIC also relevantly notes that this information may provide an indication of the level of risk involved in shorting the stock. For example, if a significant portion of that stock has already been shorted, there is a greater chance of being subject to a “short squeeze” if market sentiment changes and the investor is required to close out its position quickly.
The aggregated short position reports table managed by ASIC (ASIC Short Position Table), which is compiled by reports from individual short sellers pursuant to their reporting obligations mentioned above, reveals the percentage of issued capital that is held short in ASX-listed companies on an aggregated daily basis does not generally exceed 20%. For example, on the same day as GameStop’s all-time high share price was reached (28 January 2021) with approximately 130% of its free float being reportedly held short, the ASIC Short Position Table provided that the companies with the highest percentage of their total shares reported as short positions were:
- Webjet Limited (ASX:WEB), with approximately 14.28% of its shares reported to be held short; and
- Tassal Group Limited (ASX:TGR) with approximately 12.04% of its shares reported to be held short.
These short reported positions pale in comparison to the incredible ~130% of GameStop’s free float reported to be held short. Obviously, this means that when short sellers wish to close out their positions in such a highly shorted stock (i.e. during a short squeeze), there can be incredible demand and competition from other short sellers looking to do the same thing.
Accordingly, it would appear at least from a practical perspective, that it is easier for short sellers to cover their positions in Australia given the much larger percentage of shares that are not held in short positions.
As at the date of this article, the closing price of GameStop stock was USD$53.50 and it now remains to be seen whether this is now a case of “Game over man, game over!”.1
If you require further advice, please contact our Corporate Advisory and Governance team.
The title of this publication is a shameless reference to the 1979 hit song by ABBA “Gimme! Gimme! Gimme!” and was considered particularly apt given the US markets generally commence ordinary trading shortly after midnight Australian time.
1 Another shameless pop culture reference to the sci-fi cult movie, Aliens.