Exchanges warn of damaging impact of short selling ban

A damning statement from the World Federation of Exchanges warns that restrictions on short selling will impact price formation in volatile markets.

A widespread ban on short selling around the world will only serve to increase market uncertainty amid the coronavirus pandemic, the association for global exchanges and central counterparties (CCPs) has warned.

In a damning statement, the World Federation of Exchanges (WFE) said the bans will fail to produce the intended results. Unlike other safeguards, such as circuit breakers, which give traders time to process market information, the widespread ban on short selling will lead to less accurate pricing.

“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,” said Nandini Sukumar CEO of WFE.

Regulators across Europe opted to restrict short selling on certain stocks earlier this month following major market volatility due to the spread of the coronavirus globally. The UK, France, Italy, Spain and more have banned short selling due to the ‘serious threat to market confidence’.

WFE argued that the bans on short selling, which is a small part of the wider market, risks reinforcing the false notion that the revaluation of prices reflects a deficiency in the market, rather than a change in the value of the asset. The association also pointed to recent statements from global authorities, including IOSCO and the UK’s FCA, which state the difficult environment to price securities and derivatives means it is more important that markets remain open.

“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,” the WFE stated. “Investor protection does not imply protection from asset prices movements based on the consensus of the market in which those investors themselves are participants.”