US traders short-sell AIB stock in record volumes
Irish ban can't prevent investors betting on the bank's ultimate nationalisation
Published 24/11/2010 | 05:00
Investors are short-selling AIB's US shares in record numbers as the market takes the view the bank will be entirely nationalised soon.
The bank's shares plummeted almost 20pc in Dublin yesterday and were down by almost 18pc in early New York trading. Message boards and investors' websites in the US are full of comments about the direction of the bank's US shares, known as American depositary receipts (ADRs).
The Irish regulator has a ban on shorting Irish bank shares listed in Dublin, but the ban does not cover shares trading on the New York Stock Exchange.
Data Explorers, the global firm that tracks short-selling trends, has noted a "very interesting spike'' in AIB's US shares in recent days, with the amount of shares borrowed, most likely for short selling, at 3.7 million. The number of shares on loan has trebled in recent weeks.
Short selling is a trading strategy -- beloved of hedge funds -- where investors can profit from falling stocks. The most common way for an investor to 'short' a stock is to borrow shares in a company and sell them in the market in the hope that the price will fall. The investor can then buy the shares back and return them to their original owners -- pocketing the difference as profit.
Data Explorers said shorting of European banks was far more common in the US than in Europe now. "We have already detected a trend whereby US investors are more suspicious about the solvency of certain European nations and banks than their closer and more emotionally connected counterparts in Europe.
Apart from AIB, which appears to be one of the most popular short trades, Portuguese banks are also facing shorting attacks, with 6pc of Banco Comercial now on loan.
Trading in AIB has been a roller coaster ride over recent weeks, with the shares swinging wildly, often moved by economic events in Ireland.
However based on a year-to-date trend the shares have plunged sharply, delivering significant gains for those who have shorted the shares since the start of the year.
Earlier this year, the Irish Independent reported that the Financial Regulator was probing allegations that some overseas brokers were allowing customers to 'short' Irish bank shares despite a ban on such activity.
The controversial ban was introduced at the height of the financial crisis by Financial Regulator Patrick Neary. It remains in place even though other authorities such as the UK Financial Services Authority have relaxed their curbs.
Trading in AIB and Bank of Ireland shares can often be in very large volumes. For example Bank of Ireland's ADRs are sometimes more heavily traded than its Dublin stock.
Some traders have also noted trading patterns that are often linked to a 'short squeeze' -- when short-sellers rush to close their positions to cut their losses if a stock rises unexpectedly. This, in turn, often propels the stock even higher.