FRANKFURT (Reuters) - Shares in carmaker Volkswagen VOWG.DE nearly halved on Wednesday after controlling shareholder Porsche PSHG_p.DE took steps to ease a squeeze on shortsellers that more than quadrupled the stock in days.
Porsche itself had prompted the meteoric rise in VW stock with its announcement on Sunday that it had effective control of 74.1 percent of VW, leaving less than 6 percent in the market.
“In order to avoid further market distortions and the resulting consequences for those involved, Porsche SE intends... to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares,” Porsche said in a statement.
“This may result in an increase in the liquidity of the Volkswagen ordinary shares,” it added.
Merck Finck’s Robert Heberger said Porsche’s counterparty in the options deal would probably have covered their position by buying VW shares, and could release some now that Porsche had settled some of the options.
The stampede to cover open short positions after Sunday’s announcement vaulted VW’s market value to 278 billion euros (221.2 billion pounds) and its shares to finish at a record 945 euros on Tuesday.
Investors cried foul, and German securities watchdog BaFin said it would take a closer look at Porsche’s dealings for signs of insider trading and market manipulation, but the company said again on Wednesday it had done nothing wrong.
Analysts at Commerzbank and Merck Finck estimated Porsche’s strike price on its cash-settled hedges were around 100 euros per share, meaning Porsche could make 5.9 billion euros from selling 5 percent of its call options at a price of 500 euros.
Although it stands to gain more than the value of all of its listed preferred shares put together, a Porsche spokesman denied speculation it wanted to “cash in” with the deal.
German hedge fund association BAI said some funds might have been damaged by the squeeze, but that was inevitable in a market economy.
Aleksander Kluzniak, its chief lobbyist, said he saw no need for a regulatory clampdown on derivatives, such as a registry of hedging positions, just because the market was surprised by creeping takeovers like Porsche-VW and Schaeffler-Continental CONG.DE, which were facilitated by building up positions in cash settled options.
“I doubt it would lead to the required results. New types of derivatives or trading techniques would emerge that were not subject to this regulation,” Kluzniak explained.
Only 24 hours after peaking as the world’s biggest company by market value, VW stock fell on Wednesday as low as 491 euros as the market exhaled in relief that Porsche was releasing a part of its hedge and alleviating the worst of the squeeze.
The retreat in VW stock kept Germany's blue-chip DAX index .GDAXI in check despite-double digit percentage gains on other stocks after Wall Street clocked up its second best day's gain on Tuesday.
Down 36 percent at 600 euros by 11:41 a.m. British time, VW’s fall shaved off roughly 485 points from the index on Wednesday, meaning the DAX would otherwise be trading up nearly 11 percent were it not for the Volkswagen effect.
VW WEIGHTING CUT
Deutsche Boerse DB1Gn.DE, operator of the Frankfurt exchange, said late on Tuesday it would cut the weighting of Volkswagen shares in the DAX to 10 percent from Monday after VW's leap had distorted the index.
Index provider Stoxx Ltd also said it would cut the weighting of Volkswagen shares in its main indexes and cut Volkswagen’s free float factor to 0.3732 from 0.4963.
Volkswagen shares touched 1,000 euros at one point, pushing its weighting in the 30 member-DAX index to 27 percent.
Shortsellers who rushed to close their positions after Porsche’s announcement on Sunday were paying virtually any price to get their hands on the few remaining shares, even though Porsche insisted its announcement would allow short sellers to unwind their positions “without haste and without greater risk.”
There was wide speculation about which investment companies had been caught out by the short squeeze, and many banking shares fell as a result.
Hedge fund manager David Einhorn’s Greenlight Capital suffered heavy losses from a VW trade, people familiar with his portfolio said on Tuesday. The fund declined comment.
Additional reporting by Knut Engelmann, Christoph Steitz, Sarah Marsh, editing by Will Waterman
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