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Hedge funds absent after ASIC lifts short selling ban

Date: Monday, May 25, 2009
Author: Hearld Sun.com.au

PREDATORY hedge funds were conspicuous by their absence today after the ban on covered short-selling of financial stocks was scrapped.

The Australian Securities and Investments Commission (ASIC) said the balance between market efficiency and potential systemic concerns had moved in favour of the ban being lifted about four days earlier than expected.

But ASIC warned it would reimpose the ban immediately, and without consultation, if it considered market conditions warranted such action amid continued pressure on markets due to the global financial crisis.

The regulator, whose three controversial extensions of the ban since September made it a laggard among its global peers, said it would keep a close watch on short selling by market participants, especially hedge funds.

A widespread sell-off of financial and property stocks on Monday followed the decision, with former hedge fund target Macquarie Group Ltd finishing down $2.21, or 6.6 per cent at $31.28.

But traders said the move in Macquarie's stock - which tends to exhibit more volatile moves relative to the financial sector - was behaving normally after touching a seven month high of $37.96 on May 11.

The financial sector sell-off was only partly driven by the lifting of the ban, amid relatively lighter volumes ahead of public holidays in the US and UK, Patersons Securities' associate director John Curtin said.

Mr Curtin said a spike in trading volumes typical of hedge fund activity was absent.

"The average turnover in Macquarie over the last 20 trading days is 2.3 million shares," he said.

On Monday, 2.9 million shares changed hands.

"If you were seeing large amounts of short selling you'd expect to see reasonable volume because that is saying new sellers are hitting the market and pushing it down aggressively.

"So we are going to have slightly above average volume turnover but not by the degree that you'd be looking at for that level."

The Australian Securities Exchange S&P/ASX200 Financials Index fell 2.49 per cent, or 87.4 points, to 3425 today, as Westpac Banking Corp fell 3.61 per cent, National Australia Bank Ltd lost 2.8 per cent, Commonwealth Bank of Australia shed two per cent and ANZ Banking Group Ltd declined 1.36 per cent.

CMC Markets analyst David Taylor said it was too early to assess the full impact of the lifting of the ban, despite the financial sector dragging the overall stock market lower.

Credit Suisse said share prices could fall because financial stocks globally were re-rated at an early stage of the global recession, creating the risk that perceptions of over-valuation emerge, particularly if equity markets pull back from their recent rallies.

However, the ban's removal may also have little impact because financial groups have re-capitalised, thereby reducing the bankruptcy risk that often underpins a short-selling strategy, Credit Suisse said in a May client note.

Industry players applauded ASIC's decision, but noted the ban had impaired market liquidity and driven volatility higher rather than subduing it as originally intended.

Kim Ivey, chairman of local hedge fund industry body, the Alternative Investment Management Association (AIMA), said: "ASIC said their ban was mainly there to reduce volatility and we said it was just going to do the opposite and that's what we found.

"Once we have an equilibrium that's been set for prices that's determined by all participants there will be buying interest that was not there (previously) because we had this ban on short selling."

ASIC's move brings Australia into line with global markets and removes the growing potential for regulatory arbitrage, the Securities and Derivatives Industry Association said.

The US Securities and Exchange Commission dropped its short selling ban on October 8, 2008, and the UK's Financial Services Authority dropped its ban on January 16.

Australian Securities Lending Association co-chairman Peter Martin said the decision to lift the ban would improve market liquidity, but warned any reimposition would fuel uncertainty over market regulation in Australia.

The industry bodies have been consulting with ASIC, Treasury and the Reserve Bank of Australia over a new securities lending disclosure regime to be introduced in December.