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“No evidence” that short selling has driven market decline: CSA and IIROC

by Greg Klein | April 9, 2020

Market activity might suggest opportunistic machinations but “our systems continue to perform well,” regulators reassured participants. An April 9 joint statement from the Canadian Securities Administrators and Investment Industry Regulatory Organization of Canada addressed current volatility with an emphasis on short selling.

No evidence that short selling has driven market decline CSA and IIROC

“Over the past several weeks, IIROC has managed four market-wide circuit breakers and an increased number of single-stock circuit breakers,” said president/CEO Andrew Kriegler. “All breakers have operated as designed: to mitigate the risks of short-term price movements and ensure fair and orderly markets.”

Short selling “continues to represent a low percentage of total market activity and remains consistent with short-selling activity prior to the pandemic,” IIROC stated. “There is no evidence that short-selling activity has been the driver of recent market declines.

“We recognize that many investment and risk management strategies rely on the ability to take both long and short positions. These strategies benefit a wide range of retail and institutional investors both directly and indirectly, and any changes or restrictions to short selling could negatively impact these benefits. These negative impacts were observed in research conducted after the 2008 short sale bans were implemented on financial sector securities.”

The organization maintains it has “a robust framework in place to monitor short selling, and detect and intervene in instances involving abusive or manipulative trading.”

But a November report from business law firm McMillan LLP argued that a “combination of lax regulation, low capital costs and few consequences” makes Canada a haven for predatory shorting.

Despite IIROC’s insistence to the contrary, naked short selling is legal in Canada… Naked shorting flies entirely under the regulatory radar unless the short fails to settle for a period of 10 trading days after the expected settlement date.—A November report
from McMillan LLP

“Despite IIROC’s insistence to the contrary, naked short selling is legal in Canada,” McMillan stated. IIROC’s Universal Market Integrity Rules “allows naked short selling without any specific safeguards or requirements, so long as the short sale order is appropriately marked and the short seller can say that it had a reasonable expectation of acquiring the shares needed to settle the short sale order. Naked shorting flies entirely under the regulatory radar unless the short fails to settle for a period of 10 trading days after the expected settlement date.”

Save Canadian Mining, an advocacy group that launched in November, called on IIROC and the CSA to reinstate the tick test, which the regulators cancelled in 2012.

“The tick test restricted short selling to positive price changes at the time of the sale (i.e. an investor could only short a stock if it were on an upward trajectory),” SCM stated. “This change was applied not only to the main listing venue of the TSX Venture Exchange, but was equally applied across all Canadian trading venues of which there are 14 today. Since the removal of the tick test, Canadian markets have evolved and there now exists a dynamic where Canada’s junior markets are finding it increasingly difficult to raise capital.”

Included among the group’s supporters were the TSXV and the Ontario Mining Association.

In their April 9 statement the CSA and IIROC said they “will continue to examine new information from any market participant, including issuers and the public, regarding suspected instances of abusive short selling and other forms of market manipulation. If warranted based on either new information or from analysis, we will consider limiting short selling on particular securities.”

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