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Economic Policy Section
Activist short selling has affected many Australian
companies and made media
headlines in recent times. On 1 June 2021, the Australian Securities and
Investments Commission (ASIC) issued an information
sheet on activist short selling. This contributes to the current public
debate on whether there is appropriate regulatory oversight of activist short
What is activist short selling?
Short selling is an investment or trading strategy that allows
investors to profit when financial assets such as company shares or currencies go
down in price. When investors short sell shares (also known as taking a ‘short’
position), they borrow the shares and immediately sell them to buyers who
are willing to pay the current market price.
The short sellers are obligated to return the borrowed
shares, and in order to make a profit they hope that the share price will go
down which provides an opportunity to buy the shares at a lower price than the
original sales price.
‘Activist’ short sellers go further by taking a ‘short’
position and then releasing negative information about a company to deliberately
drive down its share price—the term ‘activist’ having the more narrow meaning
in this context of taking actions that are calculated to affect the share
Hypothetical example of activist short selling
Bob thinks the share price of
Horse & Carriage Ltd will drop because automobiles are about to be
invented. Bob calls his broker to borrow 100 shares of Horse & Carriage Ltd
from a third party. Bob immediately sells the borrowed shares at the current
market price of $2 per share, for which he receives $200.
Bob becomes an ‘activist’
short seller by spreading negative information and telling everyone that
horses will be replaced by automobiles in the future, knowing the likely effect
on the share price of Horse & Carriage Ltd.
Two weeks pass and the share
price of Horse & Carriage Ltd decreases to $1 per share. Bob buys 100
shares for $100, to return the borrowed shares to his broker. Bob has made a
$100 profit, not including fees and brokerage.
1: a visual
illustration of how short selling works
Who is affected by activist short
Activist short sellers have targeted many companies listed
on the Australian Securities Exchange by disseminating negative information
about the companies. Examples of targeted companies include SEEK,
Funds Group, and Syros
Resources. Targeted companies could potentially suffer reputational damage
and lose consumer confidence.
Activist short selling is predominantly undertaken by hedge funds
or agents acting on their behalf.
Is activist short selling legal in
Activist short selling is not prohibited in Australia, provided
that the short sellers do not breach corporations law. For example, while short
selling is allowed, it is illegal for short sellers to disseminate fraudulent
information. Other types of behaviour that breach corporations law include insider
short selling, and market
Historically speaking, regulations on short selling tend
to tighten in periods of market uncertainty. For example, after the 2008 Global
Financial Crisis the Australian Government introduced the Corporations
Amendment (Short Selling) Bill 2008 to restrict short selling.
Why is activist short selling not
There are divided opinions about the impact of activist
short selling on market efficiency and fairness. Activist short sellers believe
that they are acting as the ‘white blood cells’ of
financial markets by scrutinising overvalued shares and voicing legitimate
concerns about the companies.
Richard Holden of the University of New South Wales, among others, argues
that activist short sellers can improve market efficiency, and more regulations
may lead to a less efficient financial market. Similarly, Dr Antonis
Kartapanis of the University of Texas believes allegations levelled by
activist short sellers can be a strong predictor of corporate accounting fraud,
and that therefore activist short sellers can play a positive role in the
financial markets, while Dr Wuyang
Zhao of the University of Texas found that activist short sellers tend to
target companies with opaque operations or structure.
On the other hand, companies targeted by activist short
sellers view them as market manipulators who profit from spreading panic. The
companies argue that there is insufficient deterrence of ‘hit-and-run’
abusive short selling because it takes time for the companies to react to bad
news. By then, the activist short sellers may have already profited from their
trade and damaged the reputation of the companies. Therefore, targeted companies
tend to advocate for tougher regulations on activist short selling.
ASIC Commissioner Cathie Armour said in a media
When activist short sellers provide accurate and meaningful
new information, they can have a positive impact on price formation and market
integrity as they may counterbalance excessive market optimism. However,
activist short sellers can also unfairly distort the price of a target entity’s
securities, which is harmful to the integrity of our markets.
Internationally, there is no settled approach to the
issue, with regulators discussing the impact of activist short selling. For
example, in December 2020 the Canadian Securities Administrators published
a consultation paper to facilitate discussion about activist short selling.
In the United States, a group of
academics have petitioned the Securities and Exchange Commission to enact
more regulations on what they perceive as ‘short and distort’ selling.
ASIC information sheet on activist
On 1 June 2021, ASIC published an information
sheet (INFO 225) to recommend ‘better
practices’ for activist short sellers to follow when they disseminate
information to drive down stock price. Broadly speaking, ASIC places greater
onus on activist short sellers to ensure that the information they disseminate
is reliable and balanced, and that they give more time to companies to respond
to the information.
ASIC has set
out a number of enforcement actions it may take if activist short sellers do not follow the
recommended practices. However,
ASIC does not have regulatory oversight of activist short sellers located
ASIC has also recommended
practices’ for companies to follow
if they are targeted by activist short sellers.
toward activist short selling vary widely, with some stakeholders favouring
tougher regulations. ASIC has not announced that it will conduct a formal review
of its policy on activist short selling. Therefore it remains to be seen
whether ASIC’s information sheet is a stopgap measure that leads to greater
regulatory oversight of activist short selling, and whether the information
sheet alone will be effective in encouraging activist short sellers to follow
the recommended ‘better practices’.
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