Calls to stop ‘short selling’

Calls have been made to the Australian Stock Exchange (ASX) to prohibit ‘naked’ short selling and strengthen disclosure requirements.

The Alternative Investment Management Association (AIMA) responded to the ASX’s public consultation on short selling, identifying a ‘regulatory gap’ in Australian law on ‘naked’ short selling.

AIMA Australia chairman Kim Ivey said this occurred when the seller does not own and nor provides for securities at the time of sale, but intends to make arrangements in time to meet their obligations under current settlement procedures.

However, if arrangements have been made, the transaction is deemed a ‘covered’ short sale.

“A loophole has arisen because it is unclear what activity constitutes a covered short sale,” Ivey said.

“We are proposing a solution which includes not only a broader regulatory definition of short selling, but also enhanced reporting of short selling as part of a compulsory disclosure regime to improve market transparency.

“Australia has one of the most detailed and onerous regimes in the world for regulation of short selling, but more needs to be done to ensure we have the high levels of disclosure and transparency that are absolutely vital to enhancing Australia’s attractiveness as a regional financial centre.”

Ivey believes once ASX short selling volume is correctly measured, the aggregated figures will show only a small proportion of outstanding shares of listed Australian companies are being short sold.

“Short selling is important because it provides all market participants with important benefits like improved market liquidity and quicker pricing efficiency. Moreover, it is a valuable tool for sophisticated investors who wish to protect their capital in overvalued situations and as a hedging tool for ASX/SFE market makers who wish to quote timely and competitive market prices.”