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IMA backs short selling

The Investment Management Association (IMA) has backed investors’ right to conduct short selling and said they should not have to disclose short positions to the market.

However, it backs introducing a requirement to disclose short positions to the Financial Services Authority (FSA) in particular cases of market or instability or abuse. It says this was the case last September, when short selling of banks prompted fluctuating share prices and the FSA imposed a ban on the practice until January.

Responding to a discussion paper from the FSA, Adrian Hood, a regulatory adviser at the IMA, says that public disclosure of short positions “could seriously harm: investment managers by exposing their proprietary positions to others; other investors who may attempt to mimic the disclosed investment strategy or use the information for their own benefit without understanding the cost and without understanding the implications; and the market, by reducing efficient price discovery, increasing volatility and spreads.”

He argues reducing short selling would have a harmful effect on the country’s prosperity: “Short selling is a long established investment activity and an integral part of global capital markets.”

The FSA’s paper says that “economic theory and empirical studies support the view that short selling normally contributes to the efficient functioning of the market … We share that view.”

The FSA says short-selling makes markets more efficient and increases liquidity. However, it adds the practice can also mislead the market about the supply or valuation of a stock, especially in the case of “naked short selling”, in which shares are not borrowed before being sold. Companies conducting rights issues may be vulnerable, and short selling can contribute to disordered markets, it says.

Price inefficiency could result from market participants not knowing how much the price of a stock is being driven by short selling, it adds. But it says that restrictions on short selling come at the price of less efficient markets.

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