jmorace

Morgan Stanley: Exploding the Short-Seller Myth

I think the Credit default swaps have got to have something special to do with this whole equation.

I bet a cds market is thin and illiquid. Much easier to push around than a stock market. So, what happens when a Credit default swap rate blows out? Does it create forced hedging sell volume in the stocks?

If you're a market maker in london and somebody comes in and buys a hundred million bucks of cds's from you, it seems one of the ways to hedge this position would be to short a hundred million dollars of the stock, buying puts, selling calls, or outright shorting.

If the premium paid for the cds's seemed particularly high at the time you wrote them, then it would be very easy to aggressively sell the underlying collateral. After all, in a corporate wrap up, the bond holder is paid in full before the equity holders get a dime.

So, could this have something to do with the unusual option volume and share trading volume happening to these stocks on these grand falls we have seen? Could it be one of the causes? The CDS buyer, of course, is planning on attacking the stock from the short side, but it seems like the cds seller MUST ALSO ATTACK to hedge his exposure.

Is this right? Anybody?






Jmorace