When Porsche came to shove

It seems the consensus that purposeful clandestine opaqueness in the derivatives trade (hard to call it a market, at least in the modern "organized" market terms) is one of the root causes of the rooting the financial markets have taken of late. It was that character that allowed fast money to push around almost any traded commodity or index, up or down, over the last decade at least, as mentioned here.

How ironic, then, that users of that strategic tool to push down on VW stock are crying foul, though, in fairness to them, they are right; if transparency is said to be good for the goose, it ought to be good for the gander.

This is the story, as told in How Porsche took the wind out of the hedge funds' sails:

The auto industry around the world has been one of the hardest hit by the turmoil in financial markets. For instance, the "Detroit-Three" – Chrysler, Ford and General Motors – are in line to receive emergency funding from the American government. Meanwhile VW shares have traded far above the fair value generally agreed by analysts.

Shorting the [VW] ordinary shares and buying preference shares has been one of the most popular trades for months, according to banking sources. But the traders didn't know that Porsche was building a secret stake in its rival.

Rather than acquiring the shares directly – which would have to have been disclosed – Porsche acquired cash settled call options from a group of investment banks. Under German rules, neither the banks – which all held 4.99pc or less – nor Porsche were under any obligation to declare the stake.

Shortly after 3pm on Sunday, Porsche slipped out its bombshell – in German. So it took a while for hedge fund managers to comprehend the significance.

Porsche said it was letting the market know "to give short-sellers the opportunity to close their positions unhurriedly and without bigger risk''.

But the biggest short squeeze in recent memory was about to take place instead.

As soon as the markets opened on Monday, hedge funds and investment banks' proprietary trading desks scrambled to cover their short positions. The demand for stock sent the shares soaring, increasing the losses on the short positions and forcing others that had hoped to hang on to become forced buyers too.

All day yesterday, the panic to get out compounded the situation: at one stage, VW temporarily became the world's biggest company by market value.

As the losses have grown, so has the indignation. The hedge funds feel unfairly caught out. VW has been a popular "short".

Porsche's movement has sparked calls of foul play. "The regulator needs to investigate," Piers Hillier, head of European equities at WestLB Mellon Asset Management, told Bloomberg. "The bigger question has to be why they have not done so already. Porsche's stake-building process is at best obscure."

Porsche vehemently rejects the accusations. "The ones responsible are those that speculated with huge sums of money on a falling Volkswagen share price," said a spokesman.

One trader said: "This sort of behaviour by a public company wouldn't be allowed in the UK or US. But we can't expect help from the German authorities – this is pay back."

The German establishment has made little secret of its contempt for the high-rolling industry, with one senior politician referring to the sector as locusts"./blockquote>