London Stock Exchange supports the Financial Services Authority’s decision to lift the temporary ban on the short-selling of certain financial securities.
The decision is based on the research commissioned by the London Stock Exchange. Capital Markets Cooperative Research Centre examined the impact on liquidity of the short-selling ban, comparing liquidity in fifteen FTSE100 financial sector stocks in which short-selling was prohibited with a control group of 78 FTSE 100 securities in which short selling was not prohibited.
The research showed that liquidity was significantly weaker in the stocks affected by the ban than in the control sample as reflected in several key measures of liquidity:
Average spreads: stocks subject to the short-selling ban experienced a subsequent increase in spreads that was 150% greater than the increase in spreads in the control sample. During the 30 trading days prior to the introduction of the ban, the average spread had been steady for both groups, but increased by 140% from 15 basis points (bps) to 36 bps for those stocks which were no longer available for short-selling, compared with a rise of only 56% to 20 bps for the control sample.
Market depth: as measured by calculating the volume required to move the bid and ask price in each stock by 1%, market depth declined more markedly for the stocks subject to the ban, decreasing by approximately 59%, compared with only 43% for the control group.
Trading activity: the number of trades and volume of shares traded fell by roughly 10% in the affected stocks after the ban, but actually increased by 50% in the control sample. The divergence in trading volumes was reflected in turnover, which fell by 21% in the affected stocks, but increased by an average of 42% in the control sample.
“Short selling has become an emotive subject, because its potential misuse is more readily understood than the variety of constructive reasons why a market participant might sell stock it doesn’t own,” says Adam Kinsley, director of Regulation, London Stock Exchange. “Our research suggests that the ban on short selling did in fact impair liquidity provision and market quality in affected securities – this increases the cost of investing in equities. The FSA has reviewed the impact of its temporary short selling measures, and should be applauded for its balanced approach and proposals.”
L.D.