Wednesday, 7 January 2009

FSA and shorting again

Actually, I didn't read this properly Monday. The FSA is going to extend the disclosure of short positions in respect of the banks until June, plus it will be issuing a paper shortly setting out its plans more broadly in respect of shorting. Could be interesting.

For what it's worth I reckon investors (say ABI, IMA, NAPF) ought to fund some serious research into the impact of shorting, looking at issues such as volatility and price formation. It may well be that there is no case to answer, and to be honest I am leaning to the view that shorting is more a waste of money than anything else, but at the moment the debate seems to take place with very little evidence. So why not get the big investors to cought up some cash to fund some decent analysis?


CharlieMcMenamin said...

Well, there is this which argues that the ban had very little effect (see page 24 for the conclusions) - but it was commissioned for the International Securities Lending Association
(ISLA), the Alternative Investment Management Association (AIMA) and London Investment Banking
Association (LIBA)so I guess that's hardly surprising. It might just be a industry whitewash - I'm not really qualified to judge.

But I do have a hunch we need to define our terms a little more precisely. Much is made of shorting's 'insurance-like' function to offset risk - but clearly at least some is purely speculative and leads, or could lead, to undesirable market movements e.g. in currencies. Furthermore it's claimed advantage - of delivering, more quickly, all available information into a price might actual be counter-productive at a macro level if the sheer volume and speed of trading makes it more difficult for regulators and governments to react to events in their role as market stabilisers of last resort.

At root I find the practice morally distasteful, though that's not necessarily a basis for banning it. But the question of whether it helps or hinders the systematic development of a public utility role for banks and financial markets more generally might certainly provide such a basis.

Tom P said...

thanks for finding that Charlie - very helpful.