SYDNEY (Reuters) - Australia extended its ban on short-selling of shares on Sunday, following the United States, Britain and some other European markets in cracking down on a practice that regulators fear could worsen the global financial crisis.
Short-selling is a tactic designed to profit from falling share prices, is favored by hedge funds and has been blamed for some hair-raising plunges in world stock markets in recent days.
On Friday, the Australia regulator banned the most controversial form of short-selling, known as “naked” short sales, but did not go as far as U.S. or European regulators which also banned the more traditional form of “covered” short selling.
But the Australian Securities and Investments Commission said in a statement on Sunday that it would also ban covered short selling, which, unlike naked short-selling, requires the seller to first borrow the stock in question from a genuine investor.
The commission noted that the United States, Britain, France, Germany, Switzerland, Ireland and Canada’s Ontario market had all decided late last week to crack down on covered short-selling, raising the risk that short-sellers would now “attack” Australia.
“These developments which, in effect, restrict short selling activity in these markets, intensify the risks on the Australian market,” the commission said, adding that the Australian market was small compared with the world’s major markets.
Commission Chairman Tony D‘Aloisio said in the statement that Australia was also now going a step further than the London market and banning covered short-selling of non-financial stocks.
“These measures are necessary to maintain fair and orderly markets in these exceptional times of global crises of confidence in financial markets,” D‘Aloisio said.
“To limit the prohibition to financial stocks, as has been done in the UK, could subject our other stocks to unwarranted attack given the unknown amount of global money which may be looking for short-sell plays,” he added.
He said the ban would take effect from Monday and that would be reassessed in 30 days for non-financial stocks.
“In the case of financial stocks, the review will be in line with the time limits imposed by other international regulators such as the U.S. and UK,” it said.
Australia’s share market has been hit less hard than Wall Street or London, losing just 2 percent last week despite the biggest upheaval in the U.S. financial system since the Great Depression. But short-selling was still controversial because of some wild roller-coaster rides in the local financial sector.
Australia’s leading investment bank, Macquarie Group, plunged as much as 20 percent on Thursday, despite its repeated assurances of no major credit problems, only to rebound more than 50 percent on Friday.
Reporting by Mark Bendeich; editing by David Cowell