It was intended to stabilise the domestic market, but the 30-day ban on short-selling caused the opposite effect – draining liquidity from the exchange while increasing its volatility, according to research from Plato Investment Management.
The Plato study compares trading data preceding and following the abrupt ban, which began on September 22 and is scheduled to be addressed this week, to find that liquidity, defined as stock turnover, spread and the frequency of trades, decreased by 16 per cent while volatility, adjusted for market risk, increased from 3.3 to 4.3 per cent.
“Volumes have declined post-ban. Given the market volatility, you would expect more trading, not less,” Don Hamson, managing director of Plato, said.
According to the paper, entitled ‘Has the short-selling ban reduced liquidity in the Australian stock market?’, trading volumes dropped by 13.7 per cent after the ban was introduced – equating roughly to half of the investors in the largest state in Australia being on holiday.
“How serious was it? It was equivalent to half of the fall in volume that occurred on the Labour Day holiday in NSW,” Hamson said.
The public holiday fell on October 6, within the sample window.
Furthermore, the increases in stock-level volatility and spreads suggested that the ban lead to “further declines in the efficiency of the Australian stock market”, the paper states.
“I still don’t understand the logic as to why we had to be different from the rest of the world and not ban financials only. The stocks that have fallen have done so for good reason – those companies were over-leveraged and poorly managed,” Hamson said.
Plato contends that the ban slowed the process of price discovery and increased the cost of trading for investors. It also affected the operations of some superannuation funds.
The $660 million industry fund ConnectSuper was forced to shelve its plans to seed an equity long/short manager, and transition a long-only mandate with a manager to a long/short mandate, since the ban “impacted our ability to make changes,” Séan Leonard, chief executive of the fund, said.
The fund was preparing to terminate a long/short mandate in order to seed the new manager, Leonard said.
“We wanted to maintain our overall balance to long/short. We don’t want to take any one of these steps until we can make them altogether.”
Plato used two regression analyses to arrive at its findings: one using two 15-day periods before and after the ban, and a second drawing on overall market trading volume data. Trading data was drawn from a balanced sample of managers, the paper states.