The ban on short selling securities in Australia may have increased volatility and reduced market liquidity, ASIC has admitted in a new report.
In a review of the effects of the ban on short selling securities between 2008 and 2009, the corporate regulator acknowledged it did not fully grasp the effects the ban would have on markets and said any future measures would benefit from lessons learned.
"The ban on short selling may have exacerbated market volatility. It also potentially inhibited price discovery in the market and may have reduced market liquidity," ASIC said in the report, "Short Selling: Post-implementation review".
The short-selling measures also may have led to a number of other negative effects on market participants, including higher bid/ask spreads, lower turnover and a reduced ability for price discovery.
"These negative impacts may have been exacerbated by the length of the period of the Australian short-selling ban compared with those in other highly-developed markets," ASIC said.
The corporate regulator also acknowledged some alternative fund managers had incurred significant costs as a result of new compliance requirements and the inability to execute their trading strategies.
"The main costs incurred were the costs to implement reporting and other compliance arrangements and the loss of revenue and business opportunities because of the inability to short sell," it said.
"Some fund managers using alternative investment strategies were significantly affected in this way."
But ASIC also said the ban had delivered on a number of the objectives it aimed to achieve.
"By aligning the regulation of short selling in Australia with the approach taken by other regulators, and requiring permitted short sales to be disclosed, the short-selling measures reduced the risks that might occur as a result of short selling of Australian financial sector entities or other systemically important entities," it said.
"The reduction in settlement failure also assisted in maintaining the orderly functioning of Australian financial markets."
Although the regulator said it would not shy away from considering a short-selling ban in the future, it also indicated a total ban might not be necessary again.
"The market and regulators' understanding of short selling and its impact on trading conditions has deepened over the past three years and any future calls for taking measures similar to those of September 2008 would have the benefit of the lessons learned from the earlier short-selling ban," it said.
"In particular, the disclosure regime for covered short sales and short positions and the, now permanent, prohibition on naked short selling may limit the need for a total ban in future periods of market turmoil."
