Evidence that shorting ban “a mistake”

Reactive policies adopted because the regulators have a ‘hunch’ they’re right are frequently wrong. So, it now seems, with the ban that ASIC imposed on short-selling stocks—a common and prudent risk hedge—because, they said, it would lead to “unwarranted price fluctuations” in financial stocks.

Whatever that means: the regulator never explained to us what was ‘unwarranted’ about falls in the value of companies that no longer deserved shareholders’ confidence.

The London Stock Exchange has now received independent evidence that impact of their briefer ban on short-selling of stocks was the converse of what was intended. The ban added to volatility, reduced liquidity, and raised transaction costs in the market without saving the value of the protected stocks from tumbling.

“Liquidity in the restricted stocks fell by about 10 per cent compared with a rise of 50 per cent in trading volumes in the control sample, and transaction costs rose by 150 per cent compared with the control sample. A separate study by Cass Business School found that volatility of restricted stocks rose significantly more during the ban than volatility of unrestricted stocks.” extract from an Op Ed in the Financial Times

If this is accurate, the Australian Securities and Investment Commission offers precisely the wrong justification for extending its still more draconian ban on short-selling until 6 March.

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