Short sellers caught out in Australia

Stock exchange merger mania seems to be the order of the day, but not in Australia. Investors did not anticipate comments from the Australian Government’s Treasurer, Wayne Swan to the effect that he intended to block Singapore Exchange Ltd’s AUD 8.4 billion takeover offer for ASX Ltd (ASX:ASX), the Australian Stock Exchange on the grounds that it is a threat to national interest. We also look at the outlook for the broader securities lending market in Australia.

Short interest is quite low in ASX at 1.75% of total shares outstanding on loan. Reuters noted that the Singapore Stock Exchange has the chance to supply more information but it does not look promising. Short interest in Singapore Exchange rose earlier this year from 4% in January to 6% of total shares outstanding on loan, before falling back to January’s level. With the UK’s London Stock Exchange (LON:LSE) also in talks to merge with Canada’s TMX Group Inc (TSE:X) and a high profile tussle over NYSE Euronext (NYSE:NYX), it will be interesting to see if this makes other countries think twice.

Securities lending in Australia remains somewhat subdued and many feel this is in relation to the regulatory response to the credit crisis. As recently as January the ASIC further tightened short selling disclosure rules such that the netting of positions is not allowed between longs and shorts across different entities.

The value of Australian equities available for borrowing has risen in the last six months, as well as the value of stock on loan, which stands at USD 16 billion. The net effect is that the Long Short Ratio for Australian equities has risen a little further in favor of more supply to demand from 12 to 13 times. To put this in context, this is broadly in line with US equities which sees a record 12 times more longs than shorts in the market. Yet the total return to lendable remains a little over 2bps outside of dividend season, during which time it spiked to 10bps for a brief time in early March.

An interesting security this past quarter has been Atlas Iron (ASX:AGO). Demand to borrow this resources company shot up in December, going from 1% of all shares on loan to a 12% peak in early February. This was likely in relation to its stock and cash offer for Giralia Resources. More recently, a significant short position has taken shape in various mid cap names such as Harvey Norman Holdings (ASX:HVN) and David Jones Limited (ASX:DJS) which have 5% and 7% of their shares outstanding on loan respectively.