Mess Gets Messier

Sydney Morning Herald

Friday February 1, 2008

Stuart Washington

PROBLEMS gripping the broker Tricom Equities have revealed a little known side of the stockmarket, in which there are two share "owners" with the potential for the shares to be used for widely different purposes.

Repercussions from Tricom's practices brought the entire market to a grinding halt on Tuesday, when Tricom failed to settle all of its trades and delayed settlements until 4.42pm.

Tricom settled outstanding trades on Wednesday.

All trades had been settled by 11.50am yesterday, calming fears the broker was about to collapse.

Tricom's business operates similarly to margin lending, in which shares are used as security for loans.

But a crucial difference in the Tricom "stock lending" model is that ownership in the shares officially transfers from the borrower to Tricom.

The ownership position allows Tricom to on-lend the stock to other market players, such as hedge funds, which use them as hedges against short sales going bad.

As a direct result of the tangled ownership, clients with a margin loan through Tricom - betting on stocks going up - can theoretically have their own stocks lent to short-sellers. Short-sellers use borrowed stocks to "short" the market - selling shares they do not own and then acquiring them at a lower price when they are due to be delivered - thereby profiting on share prices going down.

This potential has raised the ire of Allco Finance Group. A fund owned by Allco executives, Allco Principals Investments, is in dispute with Tricom about the manner in which Tricom sold 20 million Allco Finance Group shares under a stock lending arrangement with Tricom.

"Under the stock lending arrangements the stock borrower [Tricom] was not allowed to on-lend the stock," a spokeswoman for Allco Finance Group said.

"If they did they did that outside the terms and spirit of the agreement. If they did, we would be very concerned."

Allco Finance Group is believed to have been hammered by short-selling in recent market falls.

Short-selling is officially monitored by the ASX, limiting the shares brokers can short sell and imposing limits on how much of a stock's security can be shorted.

But the practice of borrowing stocks to cover short-selling positions circumvents these requirements.

The prevalence of short-selling in the recent market falls has raised concerns among senior market participants.

Tricom's reason for difficulty in settling its trades was that someone it had on-lent shares to was unable to provide stock to allow settlement of a trade.

Tricom's managing director, Mr Lance Rosenberg, said this week: "They didn't give us our stock back."

Tricom Equities is now under strict supervision from the ASX, including the presence of ASX staff at Tricom, to ensure it does not have repeat difficulties in settling trades.

It is also required to report daily on its ability to meet its financial obligations.