The BT Pension Scheme (BTPS) has suspended all stock lending on concerns that short-sellers using the shares could further hurt market sentiment, two sources close to the pension scheme said.
The BTPS, Britain's largest pension scheme, in September placed some 20 British and global financial companies on its list of stocks it had barred from lending, but has now widened the ban.
"The BT Pension Scheme stopped all stock lending not just on financial stocks some months ago. Cannot say if the (decision) is permanent but it is still considered to be prudent at this time," one of the sources said.
This, I would suggest, is a pretty big deal, as BT is the biggest pension fund in the UK. Some of the feedback you get from in-house staff at funds is that such moves are driven by trustees, and it's sometimes an ill-informed decision. But the BT trustees are a pretty competent bunch, and surely recipients of much more specialist and expert advice than many others out there. So this must be quite a significant decision.
It may also suggest that the theoretical assumptions around stock-lending and shorting are beginning to shift and part of a wider reassessment of views about how markets work - something that came up in the Turner Review. The Turner Review of course asked whether decisions about shorting should take into account the dangers of market irrationality - suggesting a rather broader conception of how financial markets operate. Could BT's decision suggestion something similar developing in relation to stock-lending?
I'll briefly restate my own views here. I'm not particularly bothered by shorting in principle - because I think that it's just a set of trades so no better or worse than any other - but nor do I buy the argument that it plays as positive function as it enables negative sentiment to be expressed. A (sort of) comparable argument would be that borrowing money to buy shares is a good for markets as it allows vakuable positive sentiment to be properly expressed. And all that extra trading must be (in aggregate) a cost to someone, somewhere.
Stock-lending does provide an income for long-term investors, but it also confuses the ownership question. First, you may lend to someone who shorts the company - is that in your long-term interest? Second, you may lose the voting rights, meaning that the oversight of corporate governance is reduced. So I think there are questions for investors to ask (and some may conclude that actually the lending income is worth more).
These are by no means straightforward issues, but it does seem that sentiment is turning away from the simple mantra that shorting and stock-lending are good for liquidity and market efficiency.