Short selling involves borrowing a company’s stock and selling it, with the aim of buying it back later at a lower price. This process of buying back the stock is known as ‘covering’. Recent market activity has highlighted a pattern involving Barrenjoey, an upstart bank that has managed equity raises or block trades for several companies since June.
Specifically, an increase in short selling before these events was followed by a decrease immediately after. This suggests short sellers are using these events, when share prices trade at a discount, to cover their positions. One recent instance involved Generation Development Group (GDG), an ASX-listed investment business popular among small to mid-cap investors, led by CEO Grant Hackett, a former Olympic swimmer.
Prior to Mark Carnegie selling $80 million of his GDG shares through Barrenjoey at $7.38 per share (a 2.9 per cent discount), short interest in GDG had significantly increased. On October 15, over 17.1 million GDG shares were sold short. Following the sale, data revealed that on October 16, the number of GDG shares sold short decreased to 11.84 million – indicating that short sellers had bought back 5.2 million shares, worth approximately $39 million.
Barrenjoey maintains that this is simply a case of short sellers accurately predicting when a company will seek to raise equity or when a major shareholder will sell. Alternative explanations suggest information may be leaking, allowing traders to anticipate and profit from discounted deals. Barrenjoey dismisses this, attributing the theory to rivals and portfolio managers. What remains clear is that short sellers are actively engaging in and benefiting from Barrenjoey’s deals.