Porsche's cornering puts the skids on the market

Porsche SEImage via WikipediaA tremendous amount of glee seemed to greet the news that Porsche had "outwitted" hedge fund managers and profited enormously from squeezing short sellers in VW stock.

On October 26th Porsche announced it owned nearly 43% of VW’s shares outright, up from 35% and had derivative contracts [options] on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds).

The car manufacturer had executed a classic squeeze by controlling a huge portion of the free float [available] stock in the market, leaving short sellers unable to borrow stock to cover their positions and thus leaving them scrambling for stock at any price to cover their positions. In doing so, VW briefly became the most "valuable" company in the world and Porsche may have made paper gains of €30 billion-40 billion according to the Economist. Not bad considering Porsche had a market value of €4 billion.

That a symbol of Germany industry pulled off such a stunt is apparently a great thing. But consider had the same strategy been executed by a hedge fund or a bank. It is inconceivable that the reaction would have been the same. Instead there would have been outpourings of hatred for a demonstrable case of market manipulation that led to great instability in the markets and undermined indices.

Astonishingly no German laws were broken, yet the concealment of such stake building is something that only this week the FSA has been praised for tackling, albeit to only a partial degree. On Thursday, the City watchdog announced existing share and contracts for difference holdings, in the same company, should be aggregated for disclosure purposes in order to address concerns in relation to voting rights and corporate influence. The existing regulations already include provision to cover disclosure of entitlements to acquire voting rights resulting from holding financial instruments, including transferable securities and options, futures, swaps, forward rate agreements and any other derivative contract referred to in Section C of Annex 1 of the Market in Financial Instruments Directive (MiFID) ( as per Disclosure and Transparency Rules 5.3.2).

Hence in the UK, Porsche would have been required to disclose its' aggregate build up of an interest in VW, including the options component. As the FSA stresses, the purpose of such disclosure rules is to avoid perceived market failures.

The German regulator, Bafin, has confirmed it will investigate the events relating to the sharp movements in VW shares to establish whether there was any market manipulations. I believe that a failure by Bafin to take action, or at least redraw the rules to bring Germany's rules into line with London, will be viewed poorly in international capital markets.


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