securities lending

  • 25 May 2012 at 11:23 AM

Some People Were Selling Facebook On Friday

There’s this interesting article in the Journal today about how quickly and expensively short sellers managed to find shares of Facebook to borrow, including a graphic showing that like 150 million shares were shorted on Friday, at -10% to -40% rebates, which, what? Anyway you should read it; I for one was surprised that that much borrow came online so quickly and so share the Journal’s suspicion that some of the locates given by prime brokers were a little aggressive? Or something.

I’m less willing, though, to view the basic transaction the way the Journal does:

The role of the firms in enabling short sellers in Facebook’s stock shines a light on a long-standing Wall Street business that has the potential to create conflicts of interest. Even as one arm of a brokerage firm is getting paid to drum up interest in a stock, another part of the firm could be earning big profits by helping bet that the stock will fall in price.

“In general, Wall Street has conflicts of interest, and conflicts of interest are profitable,” said Daylian Cain, a Yale School of Management professor of business ethics. “It’s hard to navigate them when there are millions of dollars at stake.”

Two things are worth noting here. First of all, this is the sort of “conflict of interest” that comes inextricably from being a market intermediary: some of your clients want the one thing to happen, others want the other thing to happen, and the things are often – normally in secondary market trading – mutually exclusive. Read more »