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.