Canada to relax short selling rules
28 February 2011 Toronto
Image: Shutterstock
The Investment Industry Regulatory Organisation of Canada (IIROC) has announced plans to remove restrictions on short selling in falling markets.
IIROC has published two studies that look at the trends of short selling in the last three years and says the results show that there has been little or no negative change in short selling patterns in Canadian markets.
The first study looked at the relation between short sales and failed trades during the period of the greatest market turmoil in generations, from October 1, 2008 to April 30, 2009. The study found no unusual patterns of short selling or trade failure.
The second study looked at the relationship between price movement and short sale activity during a period when all of the securities traded on the TSX Venture were subject to price restrictions on short sales. These restrictions (the “tick test”) require that a short sale can only be made a price which is not less than the last sale price of that security on a marketplace. The study found that there were no “systemic” problems in the working of the short sale regime and that the tick test was not effective as a tool to restrict significant and rapid systemic declines in prices.
As a result, it plans to repeal the tick test, which meant that short selling was not permitted when a company's stock was falling. Public comments are being solicited on the proposed move.
The announcement came at the same time that the US SEC implemented the rule that imposes price restrictions on short sales if a circuit breaker has been triggered by a 10 per cent decline on a particular stock. If the circuit breaker is implemented, short sales must be priced at one increment above the best bid price for the rest of that trading day and all of the following trading day.
IIROC has published two studies that look at the trends of short selling in the last three years and says the results show that there has been little or no negative change in short selling patterns in Canadian markets.
The first study looked at the relation between short sales and failed trades during the period of the greatest market turmoil in generations, from October 1, 2008 to April 30, 2009. The study found no unusual patterns of short selling or trade failure.
The second study looked at the relationship between price movement and short sale activity during a period when all of the securities traded on the TSX Venture were subject to price restrictions on short sales. These restrictions (the “tick test”) require that a short sale can only be made a price which is not less than the last sale price of that security on a marketplace. The study found that there were no “systemic” problems in the working of the short sale regime and that the tick test was not effective as a tool to restrict significant and rapid systemic declines in prices.
As a result, it plans to repeal the tick test, which meant that short selling was not permitted when a company's stock was falling. Public comments are being solicited on the proposed move.
The announcement came at the same time that the US SEC implemented the rule that imposes price restrictions on short sales if a circuit breaker has been triggered by a 10 per cent decline on a particular stock. If the circuit breaker is implemented, short sales must be priced at one increment above the best bid price for the rest of that trading day and all of the following trading day.
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