The battle reached new highs today...ASIC power dangerousFont...

The battle reached new highs today...

ASIC power dangerousFont Size: Decrease Increase Print Page: Print John Durie | September 22, 2008
ASIC'S last-minute policy backflip on stock short-selling created massive confusion on the bourse this morning, delaying the start for the first time in the history of the modern exchange.

As expected, the result was sharply higher prices, before volume winds back dramatically in coming days.

Just what caused ASIC to change from a rational policy increasing market disclosure to effectively shutting down 40 per cent of trading within 24 hours remains unclear but Macquarie Bank is clearly a beneficiary.

The bank is understood to have contacted everyone possible to let its view be known on Saturday, after ASIC’s move on Friday, and some in Canberra say “this was a Macquarie Bank led decision”.
The bank itself told The Australian that it was one of many institutions that dealt with ASIC over the weekend.

Speaking for Macquarie, Kris Neill added that the company thought the change to ban all short sales was “appropriate and responsible and in line with action taken in other jurisdictions”.

In fact, ASIC has taken the ban much further than other jurisdictions, by banning short sales on all stocks, not just financial stocks, for explainable but, frankly, ill-thought out reasons.

The market reaction was clear to see, with Macquarie’s stock price up 9.7 per cent this morning and up 51 per cent in the last two days.

NAB is up 6.7 per cent today and 25 per cent in two days.

Other heavily shorted stocks like Asciano and Fortescue are up sharply.

ASIC has taken on itself to be the arbiter between when selling short is good and when it is bad, and when a stock is overvalued or undervalued, and for a regulator to put itself in the position of such power is dangerous and wrong.

Its move yesterday has revealed myriad anomalies - like the fact that BHP Billiton trades in the US and UK, where it can be shorted, but not in Australia, just as Lion Nathan trades in New Zealand, where it can be shorted, but not in Australia.

Roughly 40 per cent of the volume on the local bourse is so called principal trading, where brokers take on risk by selling stocks on behalf of clients to facilitate trades and employ a range of tactics like index arbitrage which is now finished.

ASIC gathered the folks from the Australian Financial Markets Association on Sunday to discuss the practical issues with its policy backflip but, clearly, not all the issues were worked through, which explains why trading was delayed this morning.

That’s what happens when policy is changed on the run and, frankly, the end result is a disgrace, particularly when, at best, this is a holding action that does nothing to counter the real issues behind the market tumbles.

When regulators intervene in functioning markets, the result creates more distortions and ultimately disaster, which is what ASIC has perpetrated today.

If that’s what Macquarie really wanted to have happen, then that too is truly bizarre