Published On: Tue, May 26th, 2009

Short Sale Ban Lifted On Financials

Australian Securities and Investments Commission

The Australian Securities and Investments Commission (ASIC) finally lifted its covered short sale ban on financial securities. The initial ban was brought into force September 21, 2008 citing “circumstances of extreme market volatility” but was turned over November 19, 2008 for all non-financial securities only. It wasn’t until May 25, 2009 that financial names were reinstated for short selling. The securities, 205 in all, comprise all names on the S&P/ASX 200 Financials Index and Wesfarmers Limited, The Rock Building Society Limited, Wide Bay Australia Ltd, Futuris Corporation Limited and Calliden Group Limited. This could change as the ASIC is empowered by an amended Short Selling Act to institute a ban on short selling at anytime it sees fit.

In support of the strong form of the Efficient Market Hypothesis (EMH) short selling ensures that shares prices reflect the views of both bullish and bearish investors. Not to mention it also adds to market liquidity and  by lowers spreads. Do you think the short sell ban has contributed to the recent market volatility?

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Currently, the Australian Securities Exchange (ASX) trading Participants must report their daily gross short sales to the ASX and, in turn, ASX e makes available a daily gross short sale report for the members and the public. The problem with reporting gross short selling data is that it may overstate actual short positions. Providing securities lending data along with the gross short selling data would provide a clearer picture of actual short selling activity.

On May 18 the ASX delivered software to provide real-time tagging on short sales in its Integrated Trading System (ITS). The goal of allowing tagging is to make reporting by its members more efficient by automating it. The tags comprise either long sale, short sale or exempt covered short sale which members are reporting manually.Tagging would provide a useful audit trail for identifying and investigating market manipultaion by means of short selling. Also, the upick rule for short selling wouldnt be necessary (at least in theory) if trades were tagged.

The ASX will eventaully make real-time tagging mandatory which means vendors 3rd party and in-house alike will have to add this feature into the trading platform likely where the client enters the initial order from their order panel. This field will then have to be mapped through the members risk system then converted to the exchanges proprietary language. Brokers will have to capture this information pre-trade for their own record keeping purposes. How are you managing this change? Will you preventing clients from going short? Or do you have a work around until the fix is in?

Is your business ready for the change?

Look for Korea to lift their Short sale ban June 1.

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