Short Selling: Assessing New Zealand

2958 WordsSep 26, 201112 Pages
Short Selling: Assessing New Zealand’s regulatory regime and future development 1. Introduction 1.1 The recent global economic crisis has seen an unparallel shift in the global perception of free markets. Regulators around the world have adopted a more strict regulatory approach to markets than seen previously. Short selling is been given particular attention from authorities due to its speculative use and questionable moral nature. As in the past, “short selling has been a favourite whipping boy”. 1.2 This essay examines the current regulatory measures in place in New Zealand regarding short selling. This essay will also evaluate the policy arguments with reference to the United States of America’s regulations and the recent economic…show more content…
Thus, the price discovery process would be disrupted and led to a misallocation of capital in the economy. There has been a lot of debate between academics on this matter. Some argue that short selling involves a speculative motive and investors profit from the other parties optimism. Further analysis implies that restrictions that hinder investors from getting in front of other investors can decrease the speed of a financial crisis. Thus, short selling restrictions can be beneficial. However, such restrictions only increase the distortion of prices and the increase subsequent corrections. Furthermore, restrictions decrease the liquidity of markets, which as the recent financial crisis has shown, is critical to the lifeblood of an economy. Overall, full regulation causes more damage to price information than non-regulated markets. However, minor regulation could be beneficial as discussed in 6.5 (ii) Effects on market abuse 5.6 In general, it is easier for short sellers to manipulate the market for their own means. Based on this logic, short selling should increase stock volatility and decrease the stability of markets as a whole. However, direct empirical evidence ultimately refutes these claims. For example, the share price of Lehman Brothers had already
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