English | 中文版 |  Русский

Breaking News:

Source: www.asiaecon.org |

AUSTRALIA'S SHORT-SELLING DILEMMA


Australia is currently the only country with a ban on short-selling. Other countries have enacted bans in the past to quell disastrous reactionary tendencies amid financial crises, but most bans are short lived. Australia originally banned short-selling of shares in September then renewed the ban in January for another 6 weeks. As the final few days approach, Australia must make the decision whether to prolong the ban by Friday.


Australia is currently the only country with a ban on short-selling. Other countries have enacted bans in the past to quell disastrous reactionary tendencies amid financial crises, but most bans are short lived. Australia originally banned short-selling of shares in September then renewed the ban in January for another 6 weeks. As the final few days approach, Australia must make the decision whether to prolong the ban by Friday.

Short-selling is the act of selling securities in anticipation of falling stock prices. A profit is then made by buying back the stocks at lower prices. Short-selling has always been controversial because it is essentially betting on the failure of a security. It has also been billed as unpatriotic when one bets on the fall of a national currency or company.

An even more controversial form of short-selling is called naked short-selling. Naked short-selling is the same as short-selling except the seller does not own the original security or has not ensured that the shares can be obtained. While this is normally not an issue in highly liquid stocks, when they are in short supply or extremely volatile, it becomes difficult if not impossible to obtain. If the seller then does not obtain the shares within the required time frame, the result is a “fail to deliver”. Naked short-selling is an extremely risky and speculative behavior, but it is attractive to some because it can be executed with little to no collateral.

Short-selling has been argued to have contributed to the collapse of Lehman Brothers. Amid false rumors about the company, a massive share sell off was exasperated by naked short-selling. Certain investors made large amounts of money by the fall of Lehman Brothers stock, enraging the population and forcing regulators to create legislation against the practice.

Another argument against short-selling is that it can be used for market manipulation. A common example is a hedge fund going short on a large number of stocks for a particular firm. The massive sell-off lowers the price of the stock and the hedge fund simply buys back their original shares a reduced price. Occasionally it is done by spreading false rumors to increase the speed or level of drop. This can only be done with massive amounts of collateral. The reason naked short-selling is highly controversial is because it is much simpler to drive massive sell-offs because a secured lender is not necessary. The fact that the stock being sold does not need to be owned requires very little upfront capital.

The decision on whether Australia will continue its ban on short-selling comes amid rumors of hedge funds and foreign speculators ready to apply massive short sales to Australian bank stocks. According to a confidential source at the Herald, there is a co-ordinated plan by about three Asian hedge funds to target Australian banks should the ban be lifted. Australia’s top four banks are prime targets because their share prices are in the world’s top 12 for banks.

The ban cannot be held forever, and all countries that have previously enacted a short-sell ban have now lifted it. The problem is short-selling is a legitimate market-trading technique that has been around for centuries. It helps create liquidity and reduces volatility. At the same time short-selling, specifically naked short-selling, can be abused for market manipulation and can be extremely damaging amid falling stock prices.

The chairman of Australian Securities and Investment Commission (ASIC), Tony D’DAloisio, said they have not decided whether or not extend the ban and no information has been heard about an impending attack. Most insiders believe and want the ban to be extended. Chief Executive of the Australian Banking Association, David Bell, said the ban must be renewed: “We’d like to see the temporary ban remain in place until the current difficult market conditions have ended”.

Whether or not the ban is lifted, the ASIC needs to implement some form of legislation that will prevent manipulation in the market. One area to focus on should be the spread of false rumors. When negative rumors are spread amid an orchestrated short-sell attack, the price of a stock falls even further, hurting the company and benefiting the sellers. Other methods can be used from countries who have lifted similar bans in the past. The United States, for example, lifted the ban in increments to diminish the effect.

Source: www.AsiaEcon.org
Please send comments and constructive suggestions to feedback@AsiaEcon.org

Source: www.asiaecon.org |


More Special Articles - Asia Business & Economy Articles