In a rare bit of backing from a major regulator, Hong Kong’s Securities and Futures Commission has come out in favor of short-selling.
The controversial practice has improved market efficiency, enhanced market depth and reduced bid-ask spreads in the Hong Kong equity market, the SFC said in a new report.
Overseas markets tightened their short-selling regulations temporarily in response to the increase in market volatility after Lehman Brothers filed for bankruptcy in September. However, SFC research shows that those restrictions did not necessarily reduce the volatility of stock prices. On the other hand, some of these measures might have reduced liquidity in the stock market.
Hong Kong’s short-selling turnover, as a percentage of total market turnover, actually declined from 8.5% from July 1 to Sept. 18 (before the short-selling ban was imposed on financial stocks in the U.S., Britain and other major markets) to 6.7% between Sept. 19 to Dec. 31, according to the report. The percentage remained relatively stable at 7.2% in the first quarter of 2009.
“Short-selling facilitates activity by professional investors and increases trading in the Hong Kong market,” said the SFC’s CEO Martin Wheatley. “Without short-selling, this additional activity would disappear. We have put in place a robust regulatory framework in Hong Kong to minimize the potential risks whilst realizing as much as possible the benefits of short selling.”