We hate to harp on about the Japan parallels we’re seeing unfolding now, but on the spreading crackdown on short-selling, it’s worth noting why Japan is one of the few key markets where regulatory angst about short-selling is conspicuously absent. That’s because back in 2002, when Japan’s Nikkei 225 Stock Average was collapsing, the authorities introduced a range of rules, including a so-called “uptick” regulation which allows investors to complete sales only when a stock’s price rose in the previous trade.
The US had a similar uptick rule, or “tick test”, which was in place for decades but abolished last year after broad agreement that it was obsolete - unfortunately just as the subprime mortgage turmoil began taking off. But the move sparked debate about how much the rule really achieved - a debate that is now intensifying. Obviously, from the strong rallies in stock markets around the world following the imposition of short-selling restrictions, the effect has been immediate. Global markets “roared in approval” on Friday, the FT noted.
But the warnings from not just hedge funds but a variety of analysts, investors and commentators - not least that the new bans will artificially drive stock markets up, setting them up for even bigger falls in the future - suggest that at some point soon there will be a change - that is, if any hedge funds and other active shorters are left standing.
Another consequence of rules in key markets that are aimed purely at preventing shorting of financial stocks, could send a wave of short-sellers into target other sectors of the markets, including retail and manufacturing stocks.
So here, courtesy of Bloomberg and others, is a neat rundown on the state of short-selling rules and restrictions around the place:
Australia on Monday extended a ban on short selling to so-called covered transactions, following similar moves in the US and UK, in an attempt to arrest a more than 20 per cent slide in its stock market this year.
The ban, which covers all stocks, triggered a 4.5 per cent rally in Australia’s benchmark S&P/ASX 200 Index, led by Macquarie, Babcock & Brown and Fortescue Metals Group, all of which had been targeted by short sellers. Hedge fund managers said the move could drive some of them out of business.
James Chirnside, of Asia Pacific Asset Management, a Sydney-based hedge fund manager, told Bloomberg the decision directly affects about 150 hedge funds, “some of which may be forced to close as a result”. ASIC and the Australian Securities Exchange said the ban on covered short sales did not include hedging positions placed before Monday. The changes will be reviewed in 30 days, ASIC said.
In Taiwan, the 150 stocks, members of the Taiwan 50 Index, Taiwan Mid-Cap 100 and Taiwan Technology Index, will be banned from short selling when they trade below the previous session’s close, the nation’s Financial Supervisory Commission said late Sunday. The ban, in force for two weeks, is to “maintain market order and stability, raise investors confidence and boost the market,” the regulator said.
Taiwan’s financial regulator banned short selling of 150 stocks after the market lost a third of its value in 2008.
The UK, Germany, France and Belgium barred short sales last week - as did Russia, which was fighting a broader and more serious meltdown in its stock and bond markets - to defend banks from trading blamed for helping wipe $3,800bn off the value of global stock markets. In the US, the SEC halted short-selling of financial companies to stop speculators benefiting from the credit crisis that led to the collapse of companies including Lehman Brothers Holdings Inc.
Thailand’s Securities and Exchange Commission said it hasn’t introduced any new rules to curb short selling.
In South Korea, naked short selling is barred, and the Financial Services Commission is looking into whether investors have complied with regulations related to short selling, according to a spokesman.
Japan’s Financial Services Agency, meanwhile, said only that it is “monitoring the developments in other markets”. An FSA official said because Japan “has always been stricter in terms of short-selling rule enforcement”, it “wasn’t experiencing the same problems as elsewhere”.
Hong Kong, also, has an uptick rule, reinstated in 1998, under which investors can’t short a stock below the most recently traded price, and had no plans to change it at this stage, said a spokesman.
Indonesia’s market regulator, meanwhile, was studying imposing a temporary ban or tightening regulation on short selling, according to Ahmad Fuad Rahmany, chairman of the Indonesian Capital Market and Financial Supervisory Institutions Agency/
Related links
The ‘Japanification’ of Wall Street
Japanificiation (II): Salutary lessons for hedgies and bankers
