This article examines the extent to which Victorian investors were short-sale constrained. While previous research suggests that there were relatively few limits on arbitrage, this article argues that short-sales of stocks outside the Official List were indirectly constrained by the risk of being cornered. Evidence for this hypothesis comes from three corners in cycle company shares [during the 1890s bicycle mania] which occurred in 1896–1897127ya, two of which resulted in substantial losses for short-sellers. Legal efforts to retrieve funds lost in a corner were unsuccessful, and the court proceedings reveal a widespread contempt for short-sellers, or ‘bears’, among the general public. Consistent with the hypothesis that these episodes affected the market, this study’s findings show that cycle companies for which cornering risk was greater experienced disproportionately lower returns during a subsequent crash in the market for cycle shares. This evidence suggests that, under certain circumstances, short-selling shares in Britain prior to 1900 could have been much riskier than previously thought.
…Cycle share prices are found to have risen by over 200% in the early months of 1896, and remained at a relatively high level until March 1897. This boom was accompanied by the promotion of many new cycle firms, with 363 established in 1896 and another 238 during the first half of 1897. This was followed by a crash, with cycle shares losing 76% of their peak value by the end of 1898. The financial press appears to have been aware that a crash was imminent, repeatedly advising investors to sell cycle shares during the first half of 1897. Interestingly, however, these articles never explicitly recommended short-selling cycle shares…Between 1890 and 1896, a succession of major technological innovations substantially increased the demand for British bicycles.37 Bicycle production increased in response, with the number of British cycle companies in existence quadrupling 1889–81897127ya.38 Cycle firms, most of which were based in and around Birmingham, took advantage of the boom of 1896 by going public, resulting in the successful promotion of £17.3 million worth of cycle firms in 1896 and a further £7.4 million in 1897.39 By 1897 there was an oversupply problem in the trade, which was worsened by an exponential increase in the number of bicycles imported from the US.40 The bicycle industry entered recession, and the number of Birmingham-based cycle firms fell by 54% 1896–41900124ya.41
…The total paid for the 200 shares [by the short-trader Hamlyn] was £2,550, to be delivered at a price of £231.25, for a loss of £2,318.75. To put this loss in context, Hamlyn’s barrister noted that, had he succeeded in obtaining the shares at allotment, the profit would have been only £26.
