ASIC Extends Short Selling Ban on Financials Again

Oh dear again. ASIC has again bowed to market rumours of potential predatory short selling, announcing today that it has extended the ban on covered short selling of financial securities until 31 May 2009.

This decision was made despite the fact that:

• Australia stands alone among the developed markets in maintaining any ban on short selling;
• derivative or exposure based short selling is not banned, thus allowing alternative (though potentially more expensive) avenues for selling; and
• the share prices of financials have underperformed the broader market over the period they have been afforded special short selling protection - All Ordinaries -14.3% vs Financials -21.7% 13 November 2008 to 5 March 2009.
  

ASIC does acknowledge that there may be a possible loss of market efficiency or price discovery as the result of the continuation of the ban, but that this is justified given the current market circumstances. The assumption here is that the ban will actually have an impact on the share prices of the companies being protected.

The decision was based on discussions with other regulators and market participants (including those who might naively expect to benefit from a continuation of the ban), but was not accompanied by any factual evidence that might support the decision.

Lets hope that by the time this decision is reviewed again, there is some reliable data available to help ASIC make a better informed decision.