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Should short selling still be banned?

Will extending the short-selling ban on financial stocks cause even more suffering to hedge funds? Are Australian regulators determined to kill an industry which already faces record redemptions and falling hiring?

The Aussie prohibition is looking decidedly passé. Foreign countries are starting to bring back short selling and local banks (the supposed beneficiaries of the ban) remain well rated.

Hedge fund managers have been lining up against the extension, claiming that it undermines market liquidity and efficiency.

So isn’t it time to ditch the ban? Aren’t Aussie banks strong enough to survive a little bit of shorting? Help out the hedgies below.

Comments (8)

  1. The local hedge fund industry is worth $62bn. We should not be trying to run it into the ground by removing one of the key tools to its success.

  2. It is very unlikely that short-selling will lead to the demise of one of the big 4 banks. Shorting is a natural part of the free-market and its use reflects market realities. Get over it!

  3. Banks are more important that hedge funds. Sorry folks. Letting banks fail creates untold problems for the whole economy – look at Lehman.

  4. I wouldn’t bet that the fall of Lehman created today’s economic problems…or was even a significant part of it…

    If companies can be praised for their good orderly management through higher demand in their shares, companies should also be punished if they are doing the opposite and short selling allows the public to do this.
    It is the investing public’s freedom of speech, so it clearly shouldn’t be banned.

  5. Why should you be able to sell something you don’t own? It creates a false market. You cannot short direct property (the house next door)….

  6. The biggest problem with the short selling issue is the lack of informed logical reasoning in the debate. Sure, basic derivative valuation tells us we need short selling to be able to hedge written positions. Simple logical also tells us naked short selling can be massivley abused. If i naked short sell 100 trillion shares in XYZ investment bank, precipitate a crash and failure, then that is obviously an abuse. That is the problem with naked short selling.

  7. KJ, i think your comments show little understanding. Naked short selling should be banned. No question about it. In the US, many stocks have been shorted beyond the issued no. of shares. I don’t think to many have a problem with that. Covered short selling, where the stock is borrowed is a completely different story.

  8. When you shortsell, in most cases you “do” own the underlying asset you’re selling. You sell, then borrow stock (owned stock) to deliver to the buyer prior to settlement. Now there’s a cap on what % you can short of a company. All naked shorts are to be reported to the ASX at the end of each trading day. The issue is that positions are not reported and dare i say no regulatory body does the “count” to properly figure out the short positions. So it may appear that ANZ for example has 1% of stock shorted, when a closer figure may be 15% at any one time.

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