It was expected that financial stocks  would rally on the first day of the  short-selling ban in Australia, back on  September 21. The ASX200 financials  index (XFJ) gained 5 per cent that day,  as shares in ANZ increased by 8.1 per  cent, Commonwealth Bank of Australia  by 4.4 per cent, Westpac by 4.9 per cent  and NAB by 5.65 per cent.

But as the market continued its  decline, with much volatility, in the following  days, Rick Steele, chief executive  of market neutral hedge fund TechInvest,  questioned whether the ban was a  “one-day wonder”.  The ban, imposed by the Australian  Securities and Investments Commission  (ASIC), was intended to shield the  Australian sharemarket from shortsellers  worldwide who found themselves  deflected from other exchanges by  similar regulatory interventions.

Tony  D’Aloisio, chairman of the regulatory  body, also pitched the ban as a “circuitbreaker”  that could restore confidence.  But the shorting bans imposed by  western and Asian market regulators  were never going to stabilise markets  destabilised by powerful macroeconomic  forces, Steele said. An absence of  short-sellers would not encourage flows  of credit, halt deleveraging and resultant  forced-selling into falling markets, or  prevent redemptions. 

Don Hamson, managing director  of Plato Investment Management,  said short-selling was not the cause  of declines in the share prices of  financial companies that were seen as  under siege: rather, the prices of these  companies fell because they were “overleveraged  and poorly-managed”.  D’Aloisio shared this view: some  downward price movements “reflected  the market being hard on companies  with high asset values and high gearing,”  he said.

While ASIC judged that shortselling  was not creating a disorderly  market, its primary focus was the disclosure  of covered short-selling.  On November 19, when ASIC  began allowing covered short-sales of  non-financial stocks, the ASX 200 had  fallen by -29.82 per cent, while the XFJ  had sunk by -30.7 per cent, since the  inception of the ban on September 21.  While the powerful macro forces make  it difficult to determine the precise  effects of the ban, some managers have  run analyses of its impacts on share  prices, trading volumes and volatility. 

Without short-selling, pricing  inefficiencies distorted the true value of  securities, according to Tribeca Investment  Partners. As buy-sell spreads of  securities widened and trading volumes  thinned out, liquidity contracted.  An increase in market volatility  was observed, too. Tribeca found the  range between the highest and lowest  daily trading prices of the median  stock doubled after the ban took effect.  However volatility spiked globally during  this time: measurements recorded  by the Volatility Index, which gauges  market expectations of near-term  volatility conveyed by S&P500 stock  options, ranged from 36.92 on September  29 as high as 89.53 on October 24,  as markets shed capital. 

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