ANALYSIS:Sean Quinn is taking Anglo stock away from investors who bet on the shares falling

ANGLO IRISH Bank seems to have benefited from the decision by businessman Sean Quinn this month to convert his family's contracts for difference (CFDs) derivatives in the bank into shares.

Anglo has outstripped gains by other Irish banks since Quinn made the announcement on July 15th. The bank has climbed 65 per cent to €6.57 (despite shedding some ground yesterday) during what has been described as a bear market rally over the past 10 days.

This compares with a 31 per cent gain for Irish Life Permanent, 30 per cent for Bank of Ireland and 19 per cent for AIB.

One trader said Anglo was regarded as a "high beta" or more volatile stock, susceptible to wider swings in share movements.

Quinn and his family are taking a stake of almost 15 per cent in the bank by converting their CFDs, which allowed them to take leveraged positions on a stock for a small percentage of its price.

This means Quinn is taking a large amount of stock away from shortsellers - investors who bet against the bank and take positions on the shares falling.

Undoubtedly, Anglo's share price has also enjoyed a disproportionately higher bounce due to Quinn's move. The underlying shares on which Quinn held his CFDs could have been loaned out to shortselling investors. By converting them to shares, this stock has become unavailable and "unborrowable", removing some volatility caused by shortsellers. "This has put a squeeze on shortsellers," said one Dublin trader.

The heavier share-buying of the past 10 days has also been attributed to "short-covering", where investors buy shares and "go long" on a stock to cover their short positions on the share prices falling. Stephen Taylor, analyst at Dolmen Securities, says shortsellers, who normally adopt an "unnatural position with limited downside", tend to panic more when share prices start rising due to the positions they have taken. "The rally has been driven by short-covering rather than money coming back into the market. You are now seeing shorts scramble to get out."

While financial stocks have endured a torrid time as the global banking crisis has raged and property values have fallen, shortselling investors have been blamed for exacerbating the declines by exploiting distressed prices and driving stocks lower.

"There is no doubt that short- sellers have made a lot of money over the last year," says Taylor.

A spokesman for IG Index, a London-based financial spread- betting company, which provides CFDs to investors, says: "Any investors taking a short on Anglo or any other bank stock since last year have been on the clever side. Bank stocks have been clobbered."

Shortselling is a common and acceptable practice and has grown with the rise of hedge funds. These investment funds take short positions to minimise the risk of holding long-term stock, so they continuously make returns in bull and bear markets, playing falling and rising stocks.

By going short, investors do not actually buy the stock. If an investor believes a stock will fall in value, they can borrow shares from a broker and sell them.

However, they must eventually buy the shares on the open market and return them to the lender, making a profit on the difference.

So, for example, take an investor who borrowed 1,000 Anglo shares in March and sold them for €8.50, the price at the time. On July 15th, they could have bought 1,000 shares at €3.98 and returned them to the lender. The investor would have made the difference as profit. This amounts to €4,520 (the difference between €8,500 and €3,980) before commissions and fees.

Shortselling relies on a readily available pool of stock that can be borrowed. The amount of loaned stock in circulation provides the best gauge of shortselling activity.

Anglo had 15.3 per cent of its stock on loan in June, compared to 10.68 per cent last January, according to Brussels securities settlements firm Euroclear.

Anglo will be keen to see its loaned stock fall following Quinn's move, taking more of its shares out of the hands of shortsellers.