NEWS

In an op ed (May 25, 2010) in the Financial Times, Martin Wheatley questions the “knee-jerk responses” to blame short selling for the economic problems and impose new rules that “generally have the opposite effect to the one intended: they create instability and introduce uncertainty.”

Martin Wheatley is chief executive officer of the Securities and Futures Commission in Hong Kong and chairman of the IOSCO technical committee’s task force on short selling.

He writes, “It seems to be the case on each occasion that the bans have been ill-thought out and thrust on the market with no prior notice. The result is a loss of confidence – and confidence in markets, particularly at this juncture, is a very fragile quality. Confidence is undermined by three different factors. The first is the immediate impact, such as shorts having to be covered, trades unwound and so on at very short notice. Just ask the London fund managers who were rudely awoken from their sleep when Australia introduced its ban in 2008 to be asked whether the orders they had left were covered or naked. The second factor is the unknown – the assumption that the situation must be much more fragile than the market thinks if policymakers are prepared to act in such dramatic fashion. The third impact is the unexpected consequences – the huge withdrawal of liquidity from the markets as a result of many strategies being no longer viable. You cannot run long/short strategies if one part of the trade is banned. For example, the market for convertible bonds dried up because convertible arbitrage relies on shorting the underlying stock, which was banned. All of these factors have shown that the short selling rule changes had a negative impact. There is as yet no evidence that shows any argument to the contrary.”