Short selling Mining CompaniesGood morning,
I don't know if it has been posted here. Interesting article on regulators taking steps on short selling.
https://magazine.cim.org/en/news/2021/regulators-to-take-steps-against-short-selling-en/ Junior miners are particularly vulnerable, he said. The companies are typically tightly held by a few large investors with only some of the stock publicly traded, making it easier to cause price fluctuations.
Terry Lynch, chief executive officer of Chilean Metals and founder of the advocacy group Save Canadian Mining, agreed. Save Canadian Mining has called for reinstating the tick test, a rule repealed in 2012 that prevented short selling on stock that was already in decline.
The Ontario taskforce didn’t recommend bringing back the tick test, but it did propose other substantial changes, including requiring shorters to confirm they can borrow the securities they’re attempting to short, and be subject to a mandatory buy-in if a sale fails to settle two days after the settlement date, or four days after the trading date.
The change would effectively end a practice known as naked shorting. Currently, short sellers are only required to have a “reasonable expectation” of settling a short trade, meaning they can short without actually having borrowed the stock – something that can be disruptive if the shorter cannot locate stock to buy back, creating more shares than actually exist in the market. Transactions must be settled in two days, but investors can have up to 10 days in exceptional circumstances.
According to Lynch, hedge funds have exploited the current loopholes by shifting uncovered bets to another company on day 11, extending their time to short. The taskforce proposal, he said, “would eliminate kiting and that would be helpful to stop predatory shorts. If those [recommendations] are put in, we’ll have a good correction in the marketplace.”
The taskforce also recommended a prohibition on short selling in connection with a prospectus offering or private placement, something that Lynch said is sorely needed.
“What happens when people use their financial muscle to push a stock down that’s unwarranted based on company news, it’s just scaring away other buyers,” he said. “Often these guys will do this in advance of a company’s financing, in particular mining companies, because it’s easy to identify when they need capital. Typically, they’ll know that their drilling program was successful and they’re going to go and raise money, and then they start to sell.”
Lynch said he is optimistic about the taskforce’s recommendations, but added that the implementation will be key. “Soft implementation won’t be any good. Implementation with teeth would require some skill, but it could be very effective.”