GLOBAL PERSPECTIVE

Markets Lacking Short Selling Opportunities Limit
Investors’ Ability to Discover Securities’ Value

Researchers found that “markets which prevent or do not practice short sales are characterized by poor information diffusion and price discovery…. Market efficiency and the ability to hedge investments are attractive factors to sophisticated global investors.”(109) Short selling differs significantly worldwide; the practice depends not only on regulatory structure but also upon costs and tax considerations.

“Our survey of world markets suggests that, while as much as 93 percent of the world’s equity market by capitalization is shortable, there are particular regions of the world where it is difficult to take a short position. These include several countries in Southeast Asia and South America.”

According to the authors’ research, “Allowing short sales seems to reduce global capital outflows. . . . [I]t suggests that market efficiency and the ability to hedge investments are attractive factors to sophisticated global investors.”(110)

After the UK Financial Services Authority imposed a temporary short selling ban for stocks in the country’s financial sector stocks in September 2008, volatility in those stocks was “substantially higher than for shares in the FTSE 350 in general.” Further,volume declined, an important measure of liquidity. For the whole period of the temporary ban, compared to a 90-day period before the ban, volume decreased 36 percent in contrast to trading volume in the FTSE 350, which fell 11 percent. Spreads also widened for the restricted stocks.(111)