Short-sale disclosure will jack up costs, sap liquidity, warns hedge fund group

Retail funds, pensions, endowments and other investors will face higher costs and lower returns if regulations requiring public disclosure of short sales are adopted, according to a study published today by the Managed Funds Association.
The research, which was conducted by management consulting firm Oliver Wyman, found that short-sale disclosure regulations adopted in the United Kingdom in 2009 have caused bid-ask spreads for effected stocks to widen by more than 45%.
In addition to causing higher costs for shorted stocks in the U.K., the study found that trading volume in the stocks decreased by 13%, including long trades.
Moreover, the U.K. disclosure regulations resulted in less liquidity in the market, which increased price volatility and decreased price discovery, the study said.
“These findings show public short-sale disclosure rules have significant negative implications for investors and businesses seeking to raise capital in a challenging global economy,” MFA chief executive Richard Baker said in a release.
The MFA, which represents the hedge fund industry, supports requiring investors to report short-sale positions confidentially to regulators. The group said such an approach would allow for investigation of any abusive short-selling activity, while avoiding unintended consequences for markets.
The Securities and Exchange Commission in 2009 adopted rules aimed at reducing abusive “naked” short sales. During a speech Friday, SEC Chairman Mary Schapiro said the new rules have substantially reduced the number of times that short-sellers have failed to deliver securities they have sold short. She also noted that the SEC we will consider additional proposals to restrict the practice of short selling.
The Committee of European Securities Regulators this week is expected to come out with a proposal that could include disclosure requirements for short-sale positions.