A study by EDHEC Business School has criticised the use of short selling bans by regulators. The report, titled The Undesirable Effects of Banning Short Sales, finds that prohibiting shorting increased, rather than reduced, volatility in global stockmarkets.
Several countries imposed restrictions on short selling in 2008, in response to concerns over share price manipulation. The British ban – imposed by the Financial Services Authority (FSA) last September – ended in January, although tighter disclosure rules for financials stocks remain in place.
According to Abraham Lioui, a finance professor at EDHEC, a lack of clarity on the reasons behind the bans triggered an increase in stock price turbulence. Daily volatility in HSBC shares, for example, rose from 0.7% between January, 2007 and June, 2007, to 2.3% between January, 2007 and January, 2009.
A similar pattern was seen in the share prices of other protected European financials. EDHEC regression analysis, designed to distinguish between the effect of the broader financial crisis and that of the ban, shows that “the crisis seems to have had a limited effect, if any, on daily volatility.”
The study recommends that regulators must better explain the choices they make. It concludes: “The markets must be convinced of the fairness of exchanges. The impact of the announcement of such an abrupt rule change is greater than the direct impact it has on the markets.”