ASIC announced this morning that it lifted the ban on “covered” short selling from the opening of trade today. ASIC originally banned short-selling on all stocks on 21 September 2008 before lifting the ban on non-financial stocks on 13 November 2009. Virtually all major markets currently allow the short-selling of financial stocks, with the UK re-introducing covered short-selling in January and the US lifting its restrictions back in October 2008.
In its statement, ASIC noted that it had:
Reviewed market conditions and considers that the balance between market efficiency and potential systemic concern has now moved in favour of the ban being lifted…ASIC will not hesitate to re-impose the ban immediately and without consultation if it considers market conditions warrant such action.
ASIC had previously extended the short-selling ban in January and March due to “volatility in financial stocks in overseas”. That fear has subsided in recent months, as global share markets have rallied and the US VIX volatility index dropped from an all-time high of more than 70, to less than 30 last week (it however rose 4% on Friday to 32).
Macquarie Group, the most prominent beneficiary of the shorting-ban, fell around 4% this morning to be trading at $32.15. Macquarie shares are however up 114% since hitting a low of $15.00 on 8 March this year. Wesfarmers (another beneficiary of the shorting ban) dropped by 1.25% this morning. Other stocks protected by the ban, including the big four banks, were relatively steady this morning, with the ANZ suffering the largest drop of 0.84%. The All Ordinaries index was up by 0.2% at 1130 AEST.
The decision by ASIC to lift the ban on short-selling had been long-awaited, with the ban being roundly condemned. In addition to the disapproval of hedge fund managers, Melbourne University professor, Ian Ramsay, had criticised the ban, noting that:
There appears to be no evidence that short-selling has had adverse effects. Secondly, other regulators have put out detailed papers on this, but ASIC has not provided public research on the effects of the short-selling ban here. It’s as if the decisions are being made in something of a vacuum. Thirdly, we do know that major regulators have said that in their jurisdictions, short-selling bans were a mistake.
The benefits of the ban on financial stocks was also doubtful. The Age previously reported that figures released by the Australian Securities Exchange suggested that financial stocks were more volatile than other shares in February (while the ban was in place), with an average daily movement of 1.5% in the S&P/ASX200 Financial Index, compared with 0.9% in the All Ordinaries Index.
Many early critics of short-selling, including Babcock’s former CEO Phil Green, departed ABC Learning boss, Eddy Groves and Transpacific CEO, Terry Peabody, have fallen from grace as their over-leveraged companies struggled to survive the financial crisis.
While financial companies, including the large banks, are now exposed to covered short-sellers, they still benefit from government guarantees on wholesale funding and regular deposits.
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