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Brexit And Short-Selling Disclosures

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Brexit And Short-Selling Disclosures – Crispin Odey is all over the place as we expected – this is an interesting study see the full thing below.

Alexandra Koehl
University of Kiel – Institute for Quantitative Business and Economics Research (QBER)

July 12, 2016


The unexpected result of the referendum on the Brexit was followed by the highest number of disclosures of short-selling positions since the enforcement of the European short-selling disclosure regime in the UK. This paper analyzes the disclosures of short positions which took place around the Brexit and shows the distribution and magnitude of reported short positions per sector. From the data, it emerges that among short-sellers the Brexit outcome was not expected, and that the sectors where the short-sellers expected the biggest losses following the Brexit are the sectors that are severely affected by the loss of value of the British Pound, namely the travel, construction, food, and retail sector.

Brexit And Short-Selling Disclosures – Introduction

In a national referendum held on June 23, 2016, the United Kingdom voted to leave the European Union, an event referred to as ‘Brexit’. This caught the financial markets, expecting a Remain vote, unprepared and caused mayor turmoil on the financial markets in the following trading days. 1 Christine Lagarde, International Monetary Fund chief, called the price movements following the Brexit “violent and brutal” (Jopson (2016)). The British Pound dropped to a 31-year low, and stocks worldwide plummeted likewise. EasyJet lost 18.50%, Barclays 20.68% alone on June 24. On June 27, 2016, the Monday following the referendum, the price of Barclays and RBS stocks fell so fast as to trigger automatic circuit breaks on the market: for five minutes, it was not possible to trade the banks’ stocks (Sheffield (2016)). Following these events, the rating agencies S&P and Fitch downgraded the UK’s rating on the basis of the expected negative impact of the referendum on the economic growth of the UK in the short run.

As a matter of fact, the Brexit vote has created the first large downward price movements on the market since the introduction of the short-selling disclosure regime by the European Union on November 11, 2012. The EU regulation No. 236/2012 regarding short-selling and certain aspects of credit default swaps, issued by the European Parliament and the European Council on March 14, 2012, imposed a ban on naked short-selling and introduced requirements regarding the public disclosure of short positions that exceed the threshold of 0.5% of the issued shares. The aim of the regulation was to introduce a measure that would still allow to benefit from short-selling on the market but would give some control over excessive short-selling in crisis times (EU, No. 236/012). Therefore, the Brexit presents the first opportunity to study which changes the short-selling activity of large positions undergoes in an environment where stock prices are expected to fall quickly. Following the Brexit, the financial conduct authority has issued a press release stating that all the EU regulations in place to date on the financial markets in the United Kingdom will remain in effect until further notice, thus allowing to continue studying the short-selling disclosure activity in the UK (The Financial Conduct Authority (2016)).

This paper investigates the short-selling disclosure activity in relation to and around the Brexit. This event has created large downward movements on financial markets worldwide, making short-selling a profitable strategy. The low number of increased short positions before the Brexit shows that the outcome of the referendum was not anticipated. Furthermore, after the Brexit a large number of short position reductions are reported, indicating that the position holders wanted to realize their gains from the large negative price movements. In contrast, as time passed, both enlarged short positions and new positions increased in number, indicating that the prices are not expected to recover right away.

The high number of increased short positions in some sectors after the Brexit gives us insights into which sectors are expected to lose the most through the Brexit. The sectors with the largest increase in short position size are all sectors that are affected the most by the devaluation of the British pound. These sectors are travel, real estate investment trust and food and retail. Up to date, there has been no previous paper investigating the short positions reported around the Brexit. In the literature, the studies investigating the effect of a possible Brexit which can be found, mostly analyze the economic and political effect of the Brexit on the UK and EU. Further, other studies have analyzed the reported short positions over a long time horizon of several years, but without any large political surprise with such a market-wide downturn as a consequence. To the best of my knowledge, no study has done so around an event triggering such large downward price movements.

The following section gives an overview of the short-selling disclosure and Brexit literature. Section 3 introduces the data and the stylized facts of the large short positions around the Brexit. Section 4 concludes.

Brexit, Short-Selling Disclosures

See full PDF below.

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