A review of the Australian Securities and Investments Commission's (ASIC's) ban on short-selling imposed at the height of the global financial crisis has concluded the ban may have contributed to adverse market characteristics but was probably justified in the circumstances.
The adverse market characteristics, strongly remarked upon by market participants at the time, included reduced liquidity and increased price volatility and increased compliance costs for many firms.
However, discussing the release of the report this week, ASIC deputy chairman Belinda Gibson noted the ban had been implemented in exceptional circumstances.
"While these effects would normally run counter to our objectives, the review concludes that the exceptional circumstances at the time – a market that was under severe strain because of unprecedented global events – were justified in order to reduce the risk of greater disorder," she said.
Further, Gibson signaled that if the same circumstances were repeated in the future "it is likely that ASIC and the Australian Government would again contemplate a ban on short-selling to bolster investor confidence and limit the potential for international regulatory arbitrage".
"Over the past three years, ASIC together with other regulators and the market have developed a much deeper understanding of short-selling and its impact on trading conditions, and any future calls for taking measures similar to those of September 2008 would have the benefit of the lessons learned from the 2008 bans," she said.
The impact of the short-selling ban on the Australian market was outlined in University of NSW research contained within the ASIC report, which said the ban had significantly reduced the trading activity of Australian financial stocks.
It said that, specifically, the average turnover of Australian financial stocks during the period of the ban declined by more than 40 per cent compared with the pre-ban period, which contrasted with much smaller reductions in turnover in the study's control group of equivalent Canadian stocks that were subject to only a very brief short selling ban.
