The effect of rumours on financial institutions can be particularly acute and were argued to have led to the collapse of Bear Stearns. Since that time we’ve seen a greater willingness on the part of regulators worldwide to intervene in financial markets and limit or ban short selling.
Last Friday, Australian financial markets woke to the news that financial regulators in France, Italy, Belgium and Spain had introduced a 15 day ban on short selling of financial stocks. This ban arose in the context of renewed equity market volatility in the wake of the downgrade of the United States by Standard & Poors and the concerns over European sovereign debt.
The ban has again sparked off debate about the proper place for short selling in financial markets and also concerns regarding rumourtrage. Rumourtrage has again been raised in the context of sharp falls in Societe Generale. An article on 7 August 2011 in the UK’s Mail on Sunday published concerns about Societe Generale which after a strong rebuttal prompted the Mail on Sunday to publish a retraction and an apology on 9 August 2011.
The Australian response
On Friday, ASIC Chairman stated there was no plan on Friday to introduce a ban on short selling in Australia describing short selling as legitimate market practice and an aid to liquidity. Market commentators have been critical of the ban in France, Italy, Belgium and Spain. Commentators pointed out that while financial stocks in those countries rose on Friday, so did financial stocks in markets without a short selling ban.