On the basis of this research, the associations see no case for continued bans on short selling as there is no strong evidence that these have been effective in reducing share price volatility or limiting share price falls.
That’s (deep breath) the International Securities Lending Association, Alternative Investment Management Association and the London Investment Banking Association speaking on Wednesday following the release of report they jointing commissioned into short selling bans.
The research was carried out by Professor Ian Marsh and Norman Niemer of the Cass Business School in London and its main findings are:
1. No strong evidence that restrictions on short selling changed the behaviour of stock returns. Stocks subject to the restrictions behaved very similarly both to how they behaved before their imposition and to how stocks not subject to the restrictions behaved.
2. Comparing behaviour across countries where the nature of the restrictions differed, the authors found no systematic patterns consistent with the expected effect of the new regulations, i.e. no evidence of a reduced probability of large price falls.
3. The authors also found no sign of any detrimental impact of the constraints in terms of reduced efficiency of pricing.
4. Regression analysis suggested that changes in stock returns were driven mainly by other factors affecting the financial sector as a whole rather than the restrictions on short selling. That is, some systematic changes in the behaviour of financial sector stocks could be discerned, but no strong evidence of a systematic impact of the restrictions could be identified.
The publication of this report could not be more timely. The Financial Services Authority will shortly have to decide whether to extend its prohibition on shorting financials – so let’s hope several copies of this report are dispatched to 25 The North Colonnade, Canary Wharf, London E14 5HS by the fastest courier available.
Related links:
Full report available here