The extended ban on short-selling, an abrupt regulatory measure aimed at restoring stability in the domestic market, has reduced liquidity while fuelling intra-day volatility, an analysis from Plato Investment Management has found. Meanwhile late last month the $5 billion Equipsuper industry fund, which became one of the most prominent opponents of predatory short-selling when it suspended its securities lending program in April, confirmed that suspension remained in place for both its Australian and international equities.
“We still needs to be convinced that there is sufficient disclosure and transparency around short-selling in Australia,” said Equipsuper CEO Robin Burns. “We’ve got nothing against shortselling, even naked short-selling has a legitimate role in the market, but we simply have a right to know what the true positions of our stocks are.” The study by Plato, a quantitative Australian equity boutique, compared trading data of ASX300 companies in the 15-day windows before and after the September 21 announcement of the ban, plus a longer-term analysis.
Plato found the average level of trades for each stock fell by 13.7 per cent, or 279 trades per day, in the period after the ban was imposed. Plato’s longer-term analysis, which covered trading data from January 2 to October 13, found the total volume of shares traded daily fell by approximately 184 million shares per day after the ban. The paper, entitled Has the Short Selling Ban Reduced Liquidity in the Australia Stock Market? , includes the October 6 Labour Day public holiday in NSW in its study period.
The manager concluded that the ban caused a contraction of liquidity similar to that experienced if half of the traders in NSW were absent. “As a very rough guide, we estimate the impact of the short selling ban has been to reduce trading by around half the impact of the NSW Labour Day holiday,” Plato wrote. The boutique argued that a constraint on short sales reduces the speed at which negative information about companies is released into the market, slowing price discovery, and that a reduction in liquidity increases the cost of trading. “Such effects are not expected to increase investor confidence,” and could make Australia “a less desirable market for investors,”
Plato wrote. “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,” said the managing director of Plato Asset Management, Don Hamson. In addition, the paper showed that intra-day volatilities of securities increased after the ban was introduced. Absolute intra-day volatility, which measures the ratio of the highest transaction price of a stock divided by its lowest price on a given day, increased from 5.4 to 7.7 per cent.
The idiosyncratic or ‘indexrelative’ volatility, which takes the absolute measure for each stock and subtracts the same measure for the market on each day, increased from 3.3 to 4.3 per cent. “Whilst a ban on short selling may have reduced the volatility of selected stocks, the objective of regulations should be to ensure the stability of the entire market, not individual stocks.”
In its analysis, Plato used controls to account for daily differences in stock turnover and volatility, and factors specific to businesses including size, industry, capital structure and ownership structure to explain differences in turnover among firms. On October 21, the Australian Securities and Investments Commission (ASIC) extended the ban on covered shorting of non-financial stocks until November 28. The prohibition on shorting financial companies will remain until 27 January next year.