Canadian market stakeholders are raising concerns about the increasing numbers of activist short selling campaigns and their impact on the markets, inspiring the Canadian Securities Administrators (CSA) to open a consultation.
Market participants claim the Canadian regulatory framework overseeing short selling is less strict in comparison to other jurisdictions, and lacks meaningful remedial actions for misconduct by hedge funds.
The CSA, the council of the securities regulators of Canada’s provinces and territories which coordinates regulation for the Canadian capital markets, has now released a paper summarising stakeholder concerns about activist short selling and outlining the Canadian and international regulatory frameworks and setting out the council’s s findings regarding the nature and extent of activist short selling in Canada.
The CSA’s research began in 2019 and found that between 2010 and September 2020, a total of 73 Canadian issuers have been the target of 116 activist short seller campaigns. Among them, 16 campaigns (including all 12 campaigns from 2020) are still active.
There has been increased activity since 2015, but annually there have been no more than five Canadian targets for every 1,000 Canadian listed issuers.
In comparison, US issuers are more frequently targeted by activist short sellers, seeing an average of 21 US targets annually for every 1,000 US listed issuers.
According to the CSA, activist short sellers tend to gravitate towards the securities of issuers and sectors where there is perceived overvaluation. Canadian campaigns also tend to focus on larger issuers such as median market capitalisation of $867 million and average market capitalization of $4.5 billion.
Approximately 75 percent of the Canadian campaigns analysed experienced a negative price impact on the day of the first campaign announcement and up to one month after the first campaign announcement.
As well as an increase in the number of activist short selling campaigns, the council notes that short sellers are able to create a bigger impact with each campaign through adept use of social media.
However, overall, the extent of the short-term price impact varied across targets and also over time.
Across all 116 Canadian campaigns, approximately 40 percent involved allegations of some type of fraud at the issuer, the most common being a stock promotion scheme.
This last point reinforces activist short sellers’ counter argument that they are more active in the market because there are more instances of market malpractice to uncover in Canada. Moreover, they argue that their research and analysis serve an important function in the price discovery process by bringing to light new information.
Elsewhere, short sellers and others have expressed concerns that regulatory intervention that restrict activist short selling could inhibit beneficial short selling activity.
Louis Morisset, CSA chair and president and CEO of the Autorité des marchés financiers, says: “In recent years, activist short selling campaigns have received considerably more attention, and stakeholders have raised concerns about the overall impact of this activity on our markets.
“To further inform our analysis, we are seeking comments on issues identified through our research.”
The CSA is requesting feedback on the consultation paper, which includes a list of consultation questions by 3 March 2021.
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