World Federation of Exchanges cautions against banning short-sales

The World Federation of Exchanges (WFE) issued a statement warning against the banning of short-selling and claiming it would be damaging to markets.

WFE CEO Nandini Sukumar stated:

Nandini Sukumar

Nandini Sukumar

Banning short-selling interferes with price formation, thereby increasing uncertainty. 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.

World Federation of Exchanges cautions against banning short-sales

The Federation advises that the measures to ban short-selling are not achieving the desired effect and unlike other circuit breakers and other safeguards put in place to slow markets down, banning short-selling inhibits orderly markets rather than promote them.

Circuit breakers allow investors time to absorb and understand information and making their trade decisions more informed. Short-selling bars prevent market participants to trade as effectively and undermine the role exchanges play in establishing the definitive, authoritative price for financial instruments.

The difficult environment makes it more important to keep markets open. The International Organization of Securities Commissions (IOSCO) pointed out the that it is important to keep the markets functional.

The UK Financial Conduct Authority said:

Our focus is on maintaining open markets that operate with integrity and we note that an ability to short sell can contribute to this, including by supporting effective price formation, enhancing liquidity and enabling risk management.

In the face of falling asset prices, authorities feel pressure to act decisively. However, European Systemic Risk Board found correlation between short-sales bans and probability of default, return volatility and price drops.

The declining market is showing the prognosis of declining profits for companies but short-sales are a small part of the market activity. The bans of short-selling risks a drawing the conclusion that the revaluation of prices indicates a shortage in the market, rather than a change in the value of the asset. Instead the WFE supports ESMA’s measures to report and publish net short positions in securities over 1%.

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