WFE goes to bat for short sellers again
30 April 2020 London
Image: wavebreakmedia/Shutterstock.com
The World Federation of Exchanges (WFE) has heaped yet more academic evidence onto the pile of papers debunking claims that short selling bans achieve their intended aims of alleviating downward pressure on markets.
WFE has published a paper that reviews the academic literature on short selling and short selling bans, comparing the arguments against banning short-selling with the arguments in favour.
From this exercise, the WFE concludes that the evidence “almost unanimously” points towards short selling bans being disruptive for the orderly functioning of markets.
The federation explains that the research indicates that such shorting freezes only serve to reduce liquidity, increase price inefficiency and hamper price discovery.
In addition, short selling bans are found to have negative spillover effects on other markets, such as options markets, it adds.
“According to the literature, during periods of price decline and heightened volatility, short-sellers do not behave differently from any other traders, and contribute less to price declines than regular ‘long’ sellers,” WFE says.
Moreover, the WFE warns that emerging markets should be particularly wary of bans on short selling as they are “more deleterious to markets characterised by a relatively high amount of small stocks, low levels of fragmentation, and fewer alternatives to short-selling”.
The paper comes shortly after Malaysia confirmed it was extending its ban until the end of June. Other emerging markets currently imposing a short ban include The Philipines and Indonesia, both of which have no set fixed deadline to repeal the order.
Bans have also been extended in several European countries. These were all endorsed by the European Securities and Markets Authority.
This week’s paper is not the first time that the WFE has gone out to bat for the short sellers recently.
In late March, the WFE's CEO, Nandini Sukumar, published a statement criticising the recent bans on short-selling as damaging to markets and failing to achieve their desired effect.
“Banning short selling interferes with price formation, thereby increasing uncertainty,” she said at the time. “That can only artificially amplify volatility and probability of default, the opposite effect to that claimed and hampers the ability of markets to serve the real economy.
“It is not – and never has been – true that bans have any other, positive effect on market activity or price levels,” she concludes.
Others to have waded in the fray on the controversial issue include State Street, which recently published a paper on the interplay between securities lending and the growing trend of environmental, social and governance investing.
Elsewhere, one of the most vocal critics of the bans is, unsurprisingly, the International Securities Lending Association. The industry body has released numerous statements denouncing the value of the bans, including via its CEO's blog and its newly-formed Council for Sustainable Finance.
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WFE has published a paper that reviews the academic literature on short selling and short selling bans, comparing the arguments against banning short-selling with the arguments in favour.
From this exercise, the WFE concludes that the evidence “almost unanimously” points towards short selling bans being disruptive for the orderly functioning of markets.
The federation explains that the research indicates that such shorting freezes only serve to reduce liquidity, increase price inefficiency and hamper price discovery.
In addition, short selling bans are found to have negative spillover effects on other markets, such as options markets, it adds.
“According to the literature, during periods of price decline and heightened volatility, short-sellers do not behave differently from any other traders, and contribute less to price declines than regular ‘long’ sellers,” WFE says.
Moreover, the WFE warns that emerging markets should be particularly wary of bans on short selling as they are “more deleterious to markets characterised by a relatively high amount of small stocks, low levels of fragmentation, and fewer alternatives to short-selling”.
The paper comes shortly after Malaysia confirmed it was extending its ban until the end of June. Other emerging markets currently imposing a short ban include The Philipines and Indonesia, both of which have no set fixed deadline to repeal the order.
Bans have also been extended in several European countries. These were all endorsed by the European Securities and Markets Authority.
This week’s paper is not the first time that the WFE has gone out to bat for the short sellers recently.
In late March, the WFE's CEO, Nandini Sukumar, published a statement criticising the recent bans on short-selling as damaging to markets and failing to achieve their desired effect.
“Banning short selling interferes with price formation, thereby increasing uncertainty,” she said at the time. “That can only artificially amplify volatility and probability of default, the opposite effect to that claimed and hampers the ability of markets to serve the real economy.
“It is not – and never has been – true that bans have any other, positive effect on market activity or price levels,” she concludes.
Others to have waded in the fray on the controversial issue include State Street, which recently published a paper on the interplay between securities lending and the growing trend of environmental, social and governance investing.
Elsewhere, one of the most vocal critics of the bans is, unsurprisingly, the International Securities Lending Association. The industry body has released numerous statements denouncing the value of the bans, including via its CEO's blog and its newly-formed Council for Sustainable Finance.
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