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Short Selling
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Opinion: Time for ASIC to ban short-selling

John Hewison
Founder and Director
3 Feb 2021

Thursday, January 28, 2021, saw a massive attack on global share markets.  Australian based short-sellers forced targeted company share prices to fall significantly and the overall ASX index to decline 1.9% or 130 points.

Whilst this may seem dramatic in isolation, if short selling is permitted to continue unabated, it has the potential to literally destroy companies and send markets into decline. This was seen during the GFC, and more recently at the start of COVID when the AAIC stepped in to place a temporary hold on the activity. 

The practice of short selling is where a short seller sells large quantities of shares it does not own in a particular company. It obtains its shares by borrowing from another institution that already holds the stock and receives financial compensation from the short seller in return.

The primary objective of the short seller is to sell the borrowed stock, force the price to fall, and then buy back at a cheaper price to return to the lender, therefore making a profit on the transaction. The quantities of shares involved in these transactions can be significant parcels of a company, sometimes in double-digit percentages of the actual listed shares. This can trigger pre-set computerised selling and investment reactions that, in some cases, cause carnage.

The victims of this activity are the companies themselves and the legitimate share investors investing in companies for the right reasons. Let me put this into context. Put simply markets were created for companies to raise capital from the public to fund their operations and achieve future growth in earnings and capital value. These are separate actions to those of various legitimate “synthetic” trading options, which all have a legitimate purpose, and do not generally affect the integrity of market pricing.

Short selling is nothing more than illegitimate market manipulation intended to trigger falsely gained profits at the expense of others. In my opinion, it is outrageously immoral if not illegal in essence.

You may wonder why the market operator the Australian Security Exchange (ASX) allows this activity to occur. Well, the reason is simply greed. The ASX was originally owned by stockbrokers as members of the exchange. This was termed as owning a seat on the exchange and any brokers wishing to join would be required to buy a seat from the other members. In 1987, the ASX incorporated and listed on the ASX with shareholders being the existing seat holders in the former exchange. So, whilst shares have been publicly traded there is still a strong vested interest by participating brokers.

The ASX derives its earnings primarily from market activity. The higher turnover, the higher the revenue. With short selling involving such massive trading volumes, the ASX is not about to take a responsible view on protecting the interests of the public or the legitimacy of its operations.

Clearly, ASIC recognises the dangers of short selling, otherwise, why did they take the action of suspending short selling in March last year?

As a licensed operator of markets and clearing and settlement facilities in Australia, ASX has various regulatory obligations under the Corporations Act 200

The following are extracts from the ASX Corporations Act obligations as disclosed on their website in respect to ASX market trading activities.

ASX has clear rules and processes on:

  • how and when buy and sell orders are matched so that prices on its markets reflect genuine supply and demand.
  • corrections or cancellations of trading errors.
  • applications of halts (regulatory or trading); and,
  • the actions ASX can take to avoid or rectify a disorderly market.
  •  ASX has arrangements in place to provide participants with timely information about prices and volume to enable them to make informed trading decisions. These arrangements also cover the circumstances when ASX may consider cancelling or correcting a trading error; suspending trading in a particular stock; or in a more extreme case, shutting the market.”

In addition, ASX has trading systems that are secure, reliable, and have sufficient capacity to handle reasonably foreseeable peak levels of trading.

Note: statements underlined by the author that appear to be contravened by short-selling activity.

Short selling is a blight on the fairness of share market trading, it is not generally understood by the share investing public and has shown to be potentially disastrous on a broad scale. ASX will argue that they provide a daily report on short selling activities, which clearly is a case of closing the door after the horse has bolted, and hardly effective compliance.

ASIC needs to call out the conflict of interest that occurs at this level, just as it does in the case of licensed client advisers operating in the space. In my view, it is a completely unscrupulous and unfair practice of market manipulation.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.