By David McIntyre
Naked short selling will be banned on the Australian stock exchange next week to help curb excessive market volatility.
Short selling, where traders seek to profit by selling borrowed shares of companies to then buy them back, in the anticipation their prices will drop, has been partly blamed for the sharp falls of stocks such as Macquarie Group Ltd in recent days.
A form of the practice, known as naked short selling, involves selling without first borrowing the stock, or even ensuring they can be borrowed.
The Australian Securities Exchange (ASX) said on Friday it would remove all securities from its list of stocks approved for naked short selling from Monday.
"The removal will remain in force until further notice," the ASX statement said.
"It will be reviewed when the government's foreshadowed legislative amendments to the reporting of covered short selling activity take effect."
Treasurer Wayne Swan and Corporate Law Minister Nick Sherry welcomed the move.
"Australia has a world-class regulatory system and this action today will help ensure ongoing confidence in the operation of Australia's financial markets," Mr Swan said in a statement.
"This action shows that our regulatory system is working well in responding to challenging global circumstances."
Senator Sherry said he was concerned by attempts to manipulate markets through the use of short-selling.
"As previously announced, the government will be introducing legislation to strengthen disclosure of covered short-selling into the parliament very shortly," he said.
The US Securities and Exchange Commission (SEC) said overnight it was considering temporarily banning naked short selling there.
Earlier on Friday, Australian Securities and Investment Commission (ASIC) deputy chairman Jeremy Cooper told a House of Representatives economics committee hearing in Sydney investors could only make naked short sales if they were on "an approved list maintained by the ASX".
"The government's indicated that it's considering new disclosure obligation regarding covered short selling."
Mr Cooper said ASIC would provide whatever advice the government needed in considering new regulations.
When asked whether existing rules were adequate, Mr Cooper declined to comment as it was a policy question.
In March, ASIC and the ASX reminded investors of their disclosure obligations when short selling stock.
ASIC also said it was concerned some individuals were spreading false and misleading information about listed companies to provoke sales of securities.
On the Australian sharemarket on Friday, Investment bank Macquarie Group jumped $9.85, or 37.81 per cent, to $35.90.
The stock has recovered most of the value it lost during the week, having slumped 38 per cent by Thursday's close.
E.L. & C. Baillieu director, Richard Morrow, said Friday's gains in the market were most likely the result of short-covering amongst investors following the surge on US indices.
Short covering is where investors buy the shares at a higher price than they sold them to cover positions that have gone the wrong way.
"It smells of some very, very heavy short-covering, especially in the finance sector, specifically in Macquarie Group," Mr Morrow said.
In the US, SEC Chairman Christopher Cox, Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting on Friday night with members of congress.
The ban, if enacted by the SEC, may well be unprecedented and a reflection of regulators' concern about the widening scope of the financial crisis.