By Chris Zappone
The Australian Securities and Investments Commission has extended the ban on short selling of financial stocks in place to May 31 in order to ease selling pressure on bank and investment stocks amid the global financial crisis.
The market regulator said it would also keep the decision under review.
''ASIC has decided to continue with its cautious approach and keep the ban in place,'' the regulator said. ''Its judgement continues to be that any possible loss of market efficiency or price discovery as the result of the continuation of the ban is justified given the current market circumstances.''
The ban was imposed on September 22, amid sharp drops in global banking stocks as the financial crisis gathered pace. Regulators in the US and UK imposed similar bans at the time and have since lifted them.
Hedge funds often short sell stock, or borrow shares to sell on the market, and them purchase them back for less, yielding a profit.
White Funds managing director Angus Gluskie said ASIC's decision was ''sensible and logical'' saying much of the criticism of the ban came from off-shore investors.
''Despite criticism for the ban, one way or another, the Australian financial sector has proven to be more resilient than the equivalent financial sectors overseas,'' Mr Gluskie said. ''At least some part of that has been to do with the short selling ban.''
He said short selling on financial stocks promoted ''rapid downward price movements'' which ''lessened the window of opportunity'' to improve a company's insolvency and stave off collapse.
The Investment and Financial Services Association, representing retail and wholesale funds, criticised ASIC's decision.
''We're not surprised and we're disappointed the ban has been extended,'' said IFSA's John O'Shaughnessy.
He said IFSA supports appropriate disclosure on stock sales and reporting to the market supervisor, however, the group was ''not overly convinced'' the short selling ban stabilises financial stocks.
Maintaining the ban also keeps Australia ''out of step'' with other markets, creating problems with funds that have global exposure, Mr O'Shaughnessy said.
ASIC said it ''weighed up the continued volatility in global financial markets and potential damage from aggressive or predatory practices from short selling against the possible loss of some market efficiency or price discovery."
Some investors expected ASIC to allow the ban to lapse, following the example of US regulators who allowed their ban on short selling financial stocks to lapse in October. The Australian ban only applies to financial stocks.
''ASIC will monitor the operation of the ban and will not hesitate to act if it finds conduct which seeks to circumvent the operation of the ban on short selling of financial securities,'' it said.