ASIC's New Short Sale Reporting Regime

ASIC has announced that it will lift the ban on short selling of non-financial stocks from 19 November 2008 to coincide with a new reporting regime for short sales.

The new arrangements require trading participants (brokers) to report short sales by security to the ASX on a daily traded (not settled) basis. Trading participants will rely on their clients providing this information at the time of the order.

The ASX will then report this information after 9:00am each trading day. The report will show the volume of short sales executed on the previous day (except for financials which are still banned) and a ratio of short sales traded to issued capital for each security.

ASIC and ASX will use the data to assist in detecting market manipulation and other non-compliance with existing obligations.

Comment:

The focus on daily information is understandable and reflects current fears about the impact of short selling in stock prices. However, in practice daily reporting is likely to be seen to be unwarranted if global experiences are any guide. In the US, short interest is reported fortnightly and changes little from fortnight to fortnight. See the short interest report on Microsoft for example which shows one year of data for Short Interest, Avg Daily Share Volume and Days To Cover.

More importantly, the data collected is unusual in that it compiles transactions. This is not how information is presented on international exchanges - global best practice - which shows short interest positions in securities. If short interest positions were collected, then they could be compared with transaction volume in the security and answer such questions as how many days of trading volume does this short interest represent and how much does this short interest represent as a percentage of issued capital. This was highlighted in my post of 14 October titled "Exposure Drfat of the Corporations Amendment (Short Selling) Bill 2008".

Investors will find the publication of short interest positions valuable in their portfolio construction and risk management. Securities with high levels of short interest are at risk of a short squeeze in the event of new positive information. Some managers will be able to implement have risk limits that prohibit further short selling when short interest reaches certain threshold levels.

Unfortunately, to use the information gathered by the ASX to produce short interest positions would be a massive (impossible) exercise. There has to be another solution.

The natural reporting solution is to require short sellers or their custodians acting as agent to provide position information to the exchange.

This information would then be then compiled by the ASX for publication. As there will be fewer parties involved as compared with the current solution because custodians will represent many short sellers, the reporting process will likely be less of a burden and will provide more useful information.