Trash and cash
By Richard Hunter | 31 Mar, 2008
In a particularly jittery sector – let alone the broader market – it does not take a great deal for a scurrilous rumour to take hold in a way that can surprise even the most seasoned investor.
The HBOS story, linked as it was to the supposed impending failure of the bank, was given more airtime than ever would have been the case in normal market conditions. The root of the rumour has not yet been substantiated, but it will almost certainly have come from a short seller with a quick profit in mind.
Short selling is the practice of selling shares (which the investor may or may not own) in the hope of a sharp drop in the share price, so that the shares can be repurchased to close the position at a lower level and, therefore, at a profit. The practice itself is perfectly acceptable – indeed, many investors will use this method, for example, as a hedge against falls in their wider portfolio as a matter of course. What is not acceptable - indeed it is illegal - is to fill the market with false rumours with the pure intention of driving the price down for personal profit – that is, to “trash and cash”.
Unfortunately, this is not a new phenomenon, nor is it confined to the UK. In the US, for example, a similar enquiry is underway following the recent collapse in the Bear Stearns share price. The phenomenon is also the direct opposite of rumours being circulated with the intention of pushing the price up (such as false bid speculation) and then selling the shares at an immediate profit – the so called “pump and dump” trade.
The difference here is that the current fragility of sentiment in markets is such that rumours such as these take on a new life, as investors flee the stock without wishing to be fleeced.
For its part, the FSA has done the easy part in identifying an example. The difficult part is then proving the case and ultimately bringing someone to book. And this is an investigation which needs to succeed – such examples of market abuse cause much harm to the shares of the company in question, the sector and indeed the reputation of the market as a whole.
