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Survey finds public disclosure of shorts would hurt

Date: Wednesday, February 10, 2010
Author: Svea Herbst-Bayliss, Reuters

* Study: public disclosure of shorts would curb liquidity
* Study released on MFA Web site

Forcing investors, including hedge funds, to disclose their short positions publicly would hurt equity markets by ultimately making trading more expensive, a new study released on Tuesday has found.

The study, conducted by consulting firm Oliver Wyman for U.S. hedge fund industry trade group Managed Funds Association, found that such public disclosure would cut trading volume and widen price spreads.

"The combined effect is that markets adopting public SSDRs (short sale disclosure rules) become more expensive and difficult venues for all investors to execute both purchases and sales of securities," the authors wrote in the report which was released on MFA's Web site on Tuesday. here

The report says that requirements to publicly disclose certain short sales in the United Kingdom have caused bid/ask spreads for certain UK stocks subject to disclosure to widen by more than 45 percent, making purchases and sales of those stocks more expensive for 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 MFA President and CEO Richard Baker.

Short selling and how to disclose it to regulators and possibly the public has been a constant theme in the financial industry since the global crisis in 2008.

Critics of short selling have said that these investors can undermine the stability of a stock while short sellers say they provide a valuable service by pointing out that they consider a stock price to be inflated.

By selling a stock short, investors hope to profit when the price drops.

During the height of the financial crisis, regulators on both sides of the Atlantic prohibited selling certain stocks short for a certain time.

U.S. regulators at the Securities and Exchange Commission did not require public disclosure after lifting their rule and they are still mulling how possibly to curb short selling.

In certain markets in Europe, short sellers must disclose their short positions in certain stocks after reaching a certain level.

Large hedge fund managers like Renaissance Technologies founder James Simons have expressed their concern about making short sales known to the public by suggesting that revealing positions publicly would be like showing their trade secrets.

The study found that by forcing public disclosure of short selling, short sellers' participation in the markets would be cut by 20 to 25 percent.

The authors said that short sellers are instrumental to having markets function efficiently because they help provide negative news in addition to the positive news brought by investors betting the share price will rise.

Short sellers, the authors write, help cut the "occurrences of price bubbles and crashes."