Cybercorp response to short inquiries
Cybercorp states:
"It is a fair assumption that if we have curved short trading on a particular issue, it strictly deals with CyBerCorp.com's risk management for both the broker dealer as well as its customers. Because the potential loss on short an issue is unlimited, it is imperative that we take precautionary steps to avoid possible high-risk scenarios. As a result, when certain issues are particularly volatile, we may make a corporate decision to remove them from the shortlist. This is absolutely justified, in that 100% of the customer defaults that have been absorbed by the firm over time have been directly related to customer short activity in extremely high volatility stocks. We have an obligation to our customers, our shareholders, and ourselves to ensure that we act responsibly in this area, and we shall continue to do so."
Well at least the truth has finally come out. As a few
others have pointed out, until this point Cyber chose not
to let their clients know that they were going to undertake
a more stringent 'risk management' of short positions and
the availability of shares. Of course, this might have an
effect on some of their clients operations, but c'est la vie.
Cybercorp very conveniently states the usual 'the risks of
short selling are potentially unlimited'. They know, as
does anybody with any market knowledge (which their clients
are *REQUIRED* to have), that this is theoretically true,
but practically false. No stock price has ever gone to
infinity that I know of. So lets speak of practical,
real world limits.
This risk occurs becuase
of a) takeover of the company, b) unexpected positive news
of great consqeunce. Cyber states they are removing
shares when stocks become very volatile, yet this is one
of the prime trading opportuties for their clients. The
fact that a stock is volatile does not automatically equate
to more risk for Cybercorp or its clients. Quite the
opposite. It is the stock that is *not* volatile, that
has a large short position, that poses a great event risk
to the broker and clients. I might add that Cyber nowhere
states the even greater risk of allowing customers to take
highly leveraged (margined) positions in these same "volatile" stocks.
Remember, you can always be long *AT
LEAST* as many shares as you can be short, and probably
many many more. Which is riskier? Short 2000 QCOM (if you
could get them) and having it go up 70 points? or Long
5000 QCOM and having it drop 70 points? Which is riskier-
a stock that churns in a 40 point range? Or one that sits
at $25 for a week and then suddenly moves to $50?
What is hidden in Cyber's response is in fact that they are
unable &/or unwilling to actively monitor their own risk in real time.
Its also clear that Cyber is not verifying the quality of their clients.
These combine to the result we see: the pulling of short
shares in the name of 'responsible risk management'.
Cyber would do itself much better to change their own
margin/capitalization requirements to reduce their risk
to rogue account defaults. And then let their clients
know exactly what the rules are so everbody knows what
they can and cannot do.
Note that Futures brokers do not remove short contract
availability from thier customers, even in times of extreme
volatility. Yet they *will* automatically close out
positions as margin maintenance limits are exceeded, and
the exchanges and brokers will raise margin requirements
as deemed necessary.
So in summary, it seems to me that Cybercorp needs to
apply some of their much tooted 'advanced risk management'
available in Cybertrader to their own back office and stop
making arbitrary and unpredictable changes in short share
availability. |
