The end after 167 years: the bankruptcy of Credit Suisse caused shock waves in the global financial sector. After all, the institute, which is now being taken over by the Swiss industry leader UBS, was one of the 30 systemically important banks in the world. However, not all market participants are following the rapid fall in the value of Credit Suisse paper with regret. Some of them even made good money from the collapse of the course. We are talking about so-called short sellers. You don't benefit from rising but from falling prices.
The whole thing basically works like this: Short sellers borrow an asset or underlying, for example shares, from an institutional provider for a certain period of time. This can be a bank, an asset manager or a large fund. In exchange for the shares they borrow, the short sellers pay an ongoing fee to the lender. After the agreed deadline, the short seller must return his borrowed shares. This is known in technical jargon as smoothing out.
The goal of short sellers is now to make a profit before closing out their short position. In a first step, they resell the borrowed securities at the current price on the stock exchange. If the price falls afterwards, the short sellers can buy back the shares at a lower price. The difference between the ideally higher sell price and lower buyback price is your profit - minus the rental fee. This means that the greater the fall in value in the agreed time window, the higher the profit for the short seller. This also explains the name of the species of speculator: short sellers sell securities that they do not own at the time of the transaction. In English, "shorting" means that investors are speculating on falling prices.
Short-selling itself is possible in two variants: First, as a short-term spot transaction, in which the short seller has to return their loan within two to three business days. Second, as a longer-term forward transaction, the duration of which is negotiated individually by the two parties.
The risky business model of short sellers is a bet on the future, in which the focus is on companies and real assets that are in crisis or are suspected to be heavily overvalued. Like any speculative business, it can backfire badly. If the share price turns positive after the sale of the borrowed securities, short sellers have to buy back the shares at a correspondingly higher price on the market in order to be able to return them to the lender on time.
Sometimes it can happen that there are a large number of short sellers who have borrowed the same paper and have to return it in a similar, tightly timed time window. This concentrated buying pressure can lead to sharp rallies on the market, which continue to aggravate the situation and are called short squeezes in technical jargon.
The recent turbulence in the banking sector in particular is increasingly attracting short sellers. Because after the collapse of the Silicon Valley Bank (SPV) and the end of the traditional company Credit Suisse, there is increasing concern about a domino effect - other institutes could get under the wheels. Short sellers sense multiple opportunities here, as shown by data from S3 Partners, among others. Accordingly, there has recently been a sharp increase in short-seller bets against several financial institutions. Short sellers benefit the most with their bets against the major French bank BNP Paribas: between the beginning and middle of March 2023 alone, short sellers made a profit of USD 375 million. In addition to Credit Suisse, there are also significant bets against Unicredit, Société Générale and HSBC Holdings.
This is well known because in Germany short sales above a certain size are notifiable. As a rule, short sellers are hedge funds and other institutional market professionals who are not interested in owning the relevant securities themselves over the long term. If the net short positions reach 0.1 percent of the issued share capital, the short seller must inform the relevant authority by 3:30 p.m. on the following trading day at the latest. From a share of 0.5 percent, the short sale positions must also be published in the Federal Gazette.
The speculative trading method of 'shorting' is also open to risk-aware and experienced private investors. You can purchase issued put warrants, which are equivalent to a put option, through your bank or broker. These securities increase in value when the underlying asset falls.
Editor's note: This article first appeared on CAPITAL.
