Yesterday the Financial Supervisory Commission in Taiwan apparently introduced restrictions on short selling activity. Previously, short selling was capped at 3 percent of a company's outstanding shares and the new restriction is 20% of the previous 30 day trading average. I haven't worked out the maths yet, but presumably the FSC believes that short selling volumes will be reduced. While I have sympathy with regulators that feel the need to do something to protect their markets (or at least to be seen to be doing something), artificial restrictions on trading are seldom the answer.
I have written before that regulators that have not repeated the mistakes of the 2008/2009 short selling bans should be given credit for not falling into the populist trap of reimposing the restrictions. Yet a minority of regulators have done it again.
Let's look at the impact on share prices for 15 selected banks across Europe from the August short selling bans implemented by France, Italy, Spain and Belgium until last Friday's close. I have compared 7 banks "protected" by these short selling bans (in red) with 8 banks where no such restrictions are in place (in green). Note: UBS shares are essentially flat, not missing from the chart.
Which group has done better? One thing is for certain, liquidity in the red group has been impacted by the exclusion of a group of traders - the short sellers. These results show that despite the exclusion of the oft-blamed speculative short sellers, traditional investors are selling, driving the prices down. Fact.
Who are you going to blame now?
