The Secret Broker: You know how to squeeze me, you know how to please me
The Secret Broker
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
I have a little secret to tell you.
To some of you it will mean nothing, to others it will mean that for years they have been duped.
You see, if you have been following all the market data on how many shares are currently short, the data you use is completely and utterly wrong.
The information that you rely on is the work of civil servants trying to close a financial loophole.
They have a go, they try their hardest but they lack the smartness of the sharp brains on the other side of their equation.
If you go back in time, when settlement of trades was paper based, it was easy to short a stock. Even the small retail investor could join in.
If you happened to sell shares in a company but couldn’t pony up with the share certificate and signed transfer form, then you would not get paid any funds.
No penalty for late delivery, just a few phone calls from your broker asking for the paperwork.
If you made the excuse that you had lost your certificate or better still, it must have been “lost in the post”, you could stay short for about a month before instructing your broker to “just buy them back”.
So the good old days were pre-1987, when a broker could open multiple false accounts and trade away both long and short and collect commission by gaming the system.
One of the perks of being a broker on the floor of the Australian or South African stock exchanges around these times was the laid back attitude of the governing authorities.
A bit like when the drink driving rules were a lot more relaxed. As everyone driving home on a Saturday night was drunk, they all managed to avoid each other and get home safely. Everyone was driving on the wrong side of the road at once.
So if everyone was doing the shorting thing what was the problem?
Answer: Because at some point a shorter has to become a buyer.
If you had sold some shares, knowing that you never really owned them, then the buyer could still sell that parcel on and a merry-go-round would start.
This meant though, that there were now more shares trading in a company than were actually on issue.
Here’s an example of what we used to do for clients – or pretend clients – so we could earn enough to stay in the steak and Penfolds lunch club.
Certain companies (especially small miners) would have shares and options listed on the exchange. The options normally arose as an incentive to apply for shares in an IPO. For example:
For every 100,000 shares you applied for at 20c, you could sometimes be rewarded with 100,000 five-year 20c options.
The rule of thumb was that each year the options had before expiry equated to 1c a year.
So in this example it would equate to 5c in value per option issued.
Now, on paper your $20,000 investment is worth $25,000 from the get go.
Not too bad a result and if it was a hot one, your broker’s family would be first in the queue. (Or the mistress, depending on whoever rewarded you the most!)
Fast forward five years and those options are coming up to expiry.
If the headstock is 20c, then the options would now have very little value and most likely expire worthless.
However, if the headstock was at 50c, then those options would be worth 30c each.
However, because they are ‘in the money’ they would trade at a discount of 2 or 3 cents.
If we could buy some options at 27c and then sell the head shares short at 51c, then we would have a no risk profit of 4c a share (51c minus 20c minus 27c).
If you could do it in 100,000 shares and options, then that is $4000 profit. As soon as the paperwork arrived on the options we would exercise them into ordinary shares.
Those new shares would then be used to cover our short position.
Short 100,000 shares – long 100,000 options. Exercise options to cover the short. Easy, right?
As everyone waited for the paperwork, our short of 100,000 shares had created more shares on issue and one day ASIC cottoned on and banned us.
From that day on, we would have to borrow 100,000 shares and then sell them into the market and then return them as new exercised ones, to cover the position.
We would also have to register that we had shorted 100,000 shares.
And this ladies and gentlemen, is where the reporting short sell register now becomes a bit of useless data.
Sure, we were short 100,000 but we never needed to buy them back, so we never needed to register this fact. The report would still show us short, even though we had now covered the position.
If you go one step further and an overseas hedge fund was shorting a company with borrowed shares, they never had to tell you, so it never got registered.
If they did tell you so, you had to register the short but they then closed their short position through another broker, so the report would still be registering their short position for months.
As I know all of this, I take all the reporting of the percentages of a company’s short positions with a very large pinch of salt.
The next bit of erroneous shorting information comes from employee options. We saw it a lot in Afterpay, where large short positions were reported.
To create a ‘no payment needed’ option for employees, a broker would short the shares, lend the money to the employee, who would then exercise them and deliver those new shares to the broker, pay off the loan and collect the difference.
We would have a whole desk specialising in doing this and aggressively chase down companies and their employees, as it was money for jam.
Many a time we were able to change an ordinary person’s life.
In one of my favourite situations, we were waiting in reception to meet with a company’s CEO and CFO and I asked the receptionist how she was finding life working there.
She loved it but she was stressed about how she could borrow $250,000 to exercise her employee options and lock in a profit.
‘Leave it to Beaver’ I told her and over the course of the next two months, we were able to create enough money for her to pay off her mortgage.
We were able to borrow the shares, sell them in the market, loan her the money to exercise her employee options and use her newly minted shares to close out the borrowed shares.
I still get Christmas cards from her today, telling me how her kids are going.
Her short position on the register is probably still there today!
A recent short ‘squeeze to please’ was in ZIP.
They rose from 50c to $1.72 on heavy short covering after they walked away from their merger with Sezzle and updated the market on their new strategy.
The short register was woefully wrong on the percentage of short positions because of the overseas hedge funds involved.
On the day they announced the merger was off, their volume started to take off as the shorters covered, leading up to the 29th July 2022, when their volume reached 68 million.
On that day they touched $1.72 before closing at $1.13 and that turnover was about 10% of the amount of shares on issue. The next day they closed at $1.06 on 25m as the short squeeze had been covered off.
When you have all of this emotional trading going on it is hard to describe in words what reactions some of the traders who were caught out would look like.
I have seen people throw their screens out of the window when the market has punched them below the belt.
The American traders were the greatests at spitting the dummy and I saw something the other day which I thought would show it better.
His ranting is not about short selling but interest rates, but his performance sums up what a stiff upper lip trading floors had to witness.
Best bit starts about 2min in and then the disclaimer at the end.
Just remember that a shorter can only make 100% on their position, which is probably why they cry so much when they lose, as their losses can be almost unlimited.
What a classic!
Feel free to contact him with your best stock tips and ideas.