Opalesque Industry Update – An independent quantitative analysis published today by international management consultancy Oliver Wyman provides the first clear evidence that rules requiring public disclosure of short positions make it more expensive and difficult for all participants to invest in equity markets. The study illustrates how under a public short sale disclosure regime, all investors – including pension funds, endowments, and retail funds – face higher costs to manage their portfolios, resulting in lower rates of return. |
The report finds that the current public short sale disclosure regime in effect in the United Kingdom (UK), has caused bid-ask spreads for UK stocks subject to disclosure to widen by over 45% – making purchases and sales of those stocks more expensive for investors. In contrast, spreads for UK stocks exempt from short sale disclosure rules increased by only 2%, and spreads of similar US stocks materially decreased during the UK short disclosure regime (January 17, 2009 – present).
The report also reveals significant findings on the effects of the UK short disclosure rules on liquidity and trading volumes. Total trading volume in UK short sale disclosure stocks – including long trades – decreased by 13% during the disclosure regime. In addition, the UK disclosure regime impaired short selling liquidity by approximately 20%, increased intraday volatility, and decreased price discovery efficiency. Together, these effects limit the ability of businesses to raise capital and create jobs, and raise costs for pension funds, retail funds, and other investors.
“These findings show public short sale disclosure rules have significant negative implications for investors and businesses seeking to raise capital in a challenging global economy,” said Richard Baker, President and CEO of Managed Funds Association (MFA). “This independent study demonstrates that recently adopted public disclosure rules in the UK have impeded equity market liquidity, decreased trading volumes, and interfered with efficient price discovery in affected stocks, driving up transaction costs for mainstream investors and burdening businesses with a higher cost of capital.”
MFA strongly believes that market confidence and stability are best promoted by regulatory measures based on rigorous economic analysis that demonstrates their costs and benefits to markets. The study provides powerful evidence that proposed EU rules requiring public disclosure of short sale positions would impose substantial costs on markets and investors.
As an alternative to public disclosure, MFA believes that policy makers seeking additional information should require investors to report short positions confidentially to regulators. Private reporting would allow regulators to identify and investigate any abusive short selling activity, while avoiding the unintended negative consequences for markets and investors.
The report can be found at: Source.
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