Hence, the opportunity for short-selling. The market thus implied that 3Com’s non-Palm assets and businesses had a negative value - a plainly absurd proposition. Instead, after the first day of trading, Palm closed at $95.06 a share, while its parent company’s stock price fell to $81.81. Logically, one share of 3Com should have been worth at least 1.5 times the Palm share price. 3Com said that it would spin off its remaining Palm shares by year-end, with shareholders promised 1.5 shares of Palm for every 3Com share they owned. The IPO resulted from a decision by parent company 3Com to carve out 3 percent of its stake in Palm. Following its IPO, Palm was ripe for shorting, but would-be short-sellers were thwarted by a sluggish securities-lending market. This strategy of selling high and then buying low depends on a properly-functioning securities-lending market - stockholders who are prepared to loan out their equity for others to trade with, in return for cash collateral. They borrow the stock, sell it, and later buy it at a lower price to return it to the lender. Short-sellers move in when they expect a stock’s price to fall. Scholars now point to the Palm case to illustrate how things can go wrong when the practice of short-selling isn’t working as it should. “It was a truly weird situation that caused a lot of head-scratching,” says Duffie. For a few months in 2000, its stock price seemed downright irrational. ![]() Palm Inc.’s handheld computers may be icons of efficiency and systematic organization, but to academics studying finance, the company’s initial public offering has come to represent something else altogether. Securities Lending: Markets Behave Strangely When Shorting Is Thwarted Here is an abbreviated version of Duffie’s seminar. Ten top banks - including Goldman Sachs, JP Morgan Chase, Merrill Lynch and Morgan Stanley - are due to launch EquiLend in 2002, to streamline and standardize the connections between borrowing and lending institutions. Until now, most banks have brokered the transactions manually. One sign of the times is the impending launch of EquiLend, an automated software platform for securities lending, which is a prerequisite of shorting. “These are topics that tend to be left out of most introductory finance courses and textbooks, but they are in fact fairly important,” said Duffie, who is the James I. The September seminar, limited to just 10 students, focused on hedge funds, convertible bonds, and securities lending, which is a prerequisite for short-selling. Thus, when the Stanford Business School launched a new, one-week program of seminars for its second-year MBAs, finance professor Darrell Duffie decided to use the opportunity to discuss these specialized areas. ![]() However, these seemingly pariah branches of the financial industry are being taken more and more seriously by both participants and researchers. Hedge funds came under the spotlight when their activities contributed to the 1997 Asian financial crisis, and when Long-Term Capital Management almost precipitated a global crash in 1998. Terrorist groups were suspected of profiting from their foreknowledge by taking short positions in financial markets. The practice of short-selling made news after the attacks on the World Trade Center and the Pentagon. ![]() They tend to hit the headlines for the wrong reasons.
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