INTERNATIONAL: WFE Warns Against Short Selling Bans

Tuesday March 31 2020

On 30^th March 2020, the World Federation of Exchanges (WFE) issued a statement, criticising recent bans on short-selling as damaging to markets and failing to achieve their desired effect.

WFE CEO Nandini Sukumar said that 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.

Unlike circuit breakers and other safeguards put in place by exchanges to slow markets down in times of stress, short-selling bans inhibit orderly markets rather than promote them. Circuit breakers allow participants time to assimilate information, with the effect of making trade-execution decisions more informed. Short-selling bans, by contrast, prevent market participants trading as effectively as possibly, thereby making price information less accurate. They consequently undermine the crucial and valuable role that exchanges play in establishing the definitive, authoritative price for financial instruments at any given time.

Investor protection is a topic that exchanges take very seriously: by providing the definitive, authoritative price at any given time; by requiring thorough disclosures and the fair dissemination of market-sensitive information; by policing against market manipulation and abuse; and, by ensuring the integrity of the trading, clearing and settlement cycle. So long as exchanges, as front-line quasi-regulatory or self-regulatory entities, determine their markets to be fair and orderly, these financial markets should operate as normal, which includes allowing short selling to continue as usual. Investor protection does not imply protection from asset prices movements based on the consensus of the market in which those investors themselves are participants.

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