SCC Chartered Accountants

Aussies set the standard on "shorting"

The Australian Securities and Investment Commission (ASIC) took share traders by surprise on the Sunday the 22nd of September.

ASIC imposed a blanket ban on all forms of short-selling across the entire market, a stricter degree of control than its initial decision to prohibit only naked short-selling on the Friday before. As well, it went considerably beyond other countries' measures to ban short-selling only on financial stocks.

Short-selling, is the practice of selling shares with the expectation of the share price to drop. This is common in stock markets across the globe.

Covered short-selling refers to first borrowing shares from owners and then selling them with the same expectation that the price of the share will fall.

Naked short-selling is a riskier practice, in which traders never borrow the shares they are selling from fund managers or other stockholders. The recent world market turmoil, punctuated by the collapse of Lehman Brothers Holdings and AIG, was believed to be compounded by a tremendous volume of short-selling activity.

After assessing global market conditions, the ASIC announced that covered short sales for any listed stock would not be permitted from the opening of the market on Monday 23rd September. The agency stated it will re-evaluate and advise the market in 30 days as to whether it will reopen covered short sales for nonfinancial stocks.

Tony D'Aloisio, the chairman of ASIC, stressed that the sudden policy change was necessary to maintain fair and orderly markets in this exceptional time of crisis of confidence in the global financial markets. "Because of the relatively small size and the structure of the Australian market, it is necessary to extend the prohibition to all stocks. To limit the prohibition to financial stocks, as has been done in the U.K., could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short sell plays," D'Aloisio said.

Australia's short-selling ban, following similar measures on Wall Street and in European markets.