NEWS
“In Praise of Short Selling. Hong Kong Offers a Lesson to Other Financial Regulators.”
The Wall Street Journal Asia. April 20, 2009. “Hong Kong’s decision not to join other countries in banning short selling last year looked smart at the time. New research makes it look even smarter.
“According to a report by the territory’s Securities and Futures Commission, Hong Kong’s stock market has seen more active trading and efficient price discovery as a result of short selling from 2003 to 2008. In other words, the territory’s decision not to ban shorting last year didn’t harm Hong Kong. It may have helped it.
“Short sellers bet that a stock’s price will fall. They are willing to trade when other investors won’t. This increase in trading activity tends to make it easier for the market to settle on an accurate price. It also narrows the difference between the prices buyers bid and sellers ask by encouraging aggressive bidding, an investor-friendly bit of efficiency. Shorting also can reduce big swings in prices by increasing the number of market players trading a stock.
“Recognizing all this, the Commission last year decided not to impose a new ban, though it did stiffen penalties on violations of existing short-selling regulations, which were already strict by global standards.
“Jurisdictions that imposed short-selling bans, by contrast, paid a price for their regulatory verve. A Credit Suisse analysis of the U.S. in September, studies of the London market released in November and December, and an analysis of Australia released in October all tell similar tales.
“Those markets saw shrinking liquidity, wider bid-ask spreads and higher volatility in shares covered by shorting bans as compared to shares that could be shorted. None of these factors helps the retail investors regulators profess to safeguard. And none of the bans fixed the fundamental problems dogging bank balance sheets or broader investor unease over the economy.
“Most of the bans have now been allowed to sunset, though Australia’s ban on shorting financial companies has been extended to the end of May. Next time, maybe more regulators will follow Hong Kong’s good example from the start.”
