The World Federation of Exchanges has criticized recent bans on short-selling as damaging to markets and failing to achieve their desired effect. Short- selling bans inhibit orderly markets rather than promote them, unlike circuit breakers put in place by exchanges to slow markets down in times of stress, the statement said.
While circuit breakers allow participants time to assimilate information, with the effect of making trade-execution decisions more informed, short-selling bans prevent market participants trading as effectively as possible, thereby making price information less accurate. This undermines the crucial role that exchanges play in establishing the definitive, authoritative price for financial instruments at any given time.
Nandini Sukumar, Chief Executive Officer at WFE, commented: “Banning
short-selling interferes with price formation, thereby increasing uncertainty. That can only artificially amplify volatility and probability of default, the opposite effect to that claimed, and hampers the ability of markets to serve the real economy. It is not – and never has been – true that bans have any other, positive effect on market activity or price levels.”
The UK Financial Conduct Authority has stated the importance of keeping markets open. “Our focus is on maintaining open markets that operate with integrity and we note that an ability to short sell can contribute to this, including by supporting effective price formation, enhancing liquidity and enabling risk management.” The European Systemic Risk Board found that “bans on short sales tend to be correlated with higher probability of default, greater return volatility and steeper stock price declines.”
“Short-selling bans risk reinforcing the false notion that the revaluation of prices reflects a deficiency in the market – rather than a change in the value of the asset. We support instead market transparency and, in this regard, recognize the regime ESMA has put in place to report and publish net short positions in securities exceeding 1% of the free-floated shares”, the WFE stated. Investor protection is a topic that exchanges take very seriously: by providing the definitive, authoritative price at any given time; by requiring
thorough disclosures and the fair dissemination of market-sensitive information; by policing against market manipulation and abuse; and, by ensuring the integrity of the trading, clearing and settlement cycle. So long as exchanges, as front-line quasi-regulatory or self-regulatory entities, determine their markets to be fair and orderly, these financial markets should operate as normal, which includes allowing short selling to continue as usual. Investor
protection does not imply protection from asset prices movements based on the consensus of the market in which those investors themselves are participants”.
