Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, February 26, 2009

Ban short selling, enforce disclosure or both?

Next Tuesday I have the pleasure of moderating a webinar with 3 distinguished speakers. Details are on the IR Society’s website here. The title is "Shorting - To Ban or Not To Ban". It’s an interesting question, to which I suspect many regulators would like to know the answer.

In the US the ban was short-lived and in the UK it was lifted last month, as was Australia’s. But Belgium, France, Germany and Switzerland extended their bans until further notice or through to the spring. CESR maintains a list here. This week the French regulators have started a consultation process allowing the market until early April to give feedback on the ideas offered by a working group the AMF commissioned back in September.

Many would argue that short selling is a force for good when used in investment strategies and risk management activities to enhance returns to investors. It contributes to market liquidity, reduces transaction costs and helps ensure pricing efficiency. Research from Cass Business School and from Edhec Risk & Asset Management Research Centre argued that short selling does not get in the way of efficient markets.

So the wider argument may be around the issue of disclosure, where views from the market differ. Regular short sellers argue that disclosures of short positions give the wider market access to the proprietary research that they have done. And trading platforms exist that will mimic their strategies, based on those disclosures.

Meanwhile, IR may argue that withholding information about who influences their shares creates an unbalanced – and hence unfair – market. The argument will rumble on, with many similarities to that surrounding long CFD’s. (By the way, look for an FSA announcement on the new CFD rules next Tuesday).

But what about stock lending? Stock lending is not a proxy for short selling, but IR would welcome the non aggregated disclosure of stock lending positions to enhance the quality of their share register analysis. And in fact the Reserve Bank of Australia has just announced that ASX will require all transactions related to securities loans to be ‘tagged’ when they are submitted for settlement, and the ASX will publish data on securities loan transactions and the stock of loans outstanding on a daily basis.

So the debate on Tuesday will be interesting.

2 Comments:

  • At 8:08 pm, Blogger zedman said…

    I'm looking forward to the discussion. I think the media coverage of Odey's short position in Legal & General shares created a potential distortion. Had a long investor purchased a similar (but opposite) sized transaction, it wouldn't have been disclosed. The public would have been aware of the "King of Short Sellers" (media words, not mine) view of L&G and may have been frightened into selling. Yet a more positive view would have had no coverage. I think this is an example of the unintended consequences of the short sale disclosure.

     
  • At 5:23 pm, Anonymous Roy Zimmerhansl said…

    Mark, I thought the webinar was excellent today, well done and thanks!
    I am going to make a reference to the event in my blog tomorrow.

     

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