Australia Extends Short Selling Ban on Financials

Oh dear. The Australian Securities and Investments Commission has extended the ban on short-selling financials to 6 March 2009.

But what were they thinking?

ASIC has described the decision as a cautious one, responding to the renewed selling in financials in London and New York that coincided with the lifting of the ban on short selling financials in the UK on 16 January 2009.

But by acting differently to other regulators globally, and in view of Australia's large weight to financials, it is a risky decision that is likely to further tarnish our reputation as a reliable financial market.

There is no evidence that such bans have been effective in achieving higher share prices, or that when not in place, have resulted in lower share prices. A relative outperformance of financials in Australia of 8 percentage points over the period since the ban on non-financials was lifted has been touted as evidence that the ban has worked. But there are many factors at work in determining share prices not just short selling. The influence of short selling on share prices is just unsubstantiated heresay based on a fear of predatory practices; we need some solid evidence.

And what is the regulator, supposedly responsible for ensuring free and fair markets, doing trying to rig higher share prices for financial stocks? At the least they are terribly conflicted. At worst they are driving out investors (who want fair prices and access to short selling as a tool to manage risk), reducing market liquidity and the attractivess of the Australian market to raise capital and contributing to the undermining of Australia as a regional financial centre.