• Public SSDR reduces liquidity
  • Bid-ask spreads, price discovery improved where requirements don't apply

Public short-selling disclosure requirements ("public SSDR") will reduce short-selling in the equity markets and have "detrimental impacts" upon them by withdrawing valuable liquidity, according to a report sponsored by the Managed Funds Association.

The report (http://www.managedfunds.org/downloads/Oliver_Wyman_Financial_Services_Report.pdf) published on 9th February, analysed differences between a test group which was subject to SSDR and a number of control groups which were not.

Its key findings were that that in markets subject to public SSDR the liquidity provided by short sellers is impaired, and their participation in equity markets decreased by between 20% and 25%. Amongst its findings, it said, were that where public SSDR applied, investors were less willing to disclose short interest, and that there was a reduction in market capacity to support short selling.

It also found that the imposition of a public SSDR resulted in beneficial owners "reducing the lendable equity supply and thus reducing market capacity for stock lending,".

Market (in)efficiencies

The report said that public SSDR had a negative impact not only on market liquidity but also bid-ask spreads, price discovery and intraday volatility and that in the test group subject to public SSDR, a 13% decrease in trading volumes was experienced while the control groups experienced increases in trading volumes.

In a similar vein, it added that the two metrics of price discovery efficiency, co-movement and abnormal returns indicated that stocks subject to the disclosure requirements performed "significantly worse" than equivalent groups in which the requirements did not apply, thus reducing the likelihood of investors paying "fair value" for securities.

On the whole, the report concluded, short-selling liquidity decreases had a number of adverse impacts including a decrease in trading volumes, widening of bid-ask spreads, less efficient price discovery and increased intraday volatility, with the combined effect that "markets adopting public SSDR become more expensive and difficult venues for all investors to execute both purchases and sales of securities."

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