Short Selling Still an Option

September 23, 2008 New Zealand Taxation  No comments

The New Zealand Stock Exchange (NZX) have issued a statement saying that they will not be following the Australian Stock Exchange(ASX) in banning short selling of stock.

The Australian Securities and Investments Commission (ASIC) banned all forms of short selling on the 19th of September, widening the previous ban on “naked” short selling to include “covered” short selling also. While this action was a response to the turmoil caused on the ASX by naked short selling, the NZX does not see enough short selling activity to warrant such a ban at this point.

Geoff Brown, the NZX markets development manager, was quoted as saying that New Zealand firms are already required to disclose any short sales and that in the eyes of the NZX, short selling was a legitimate activity. He also said that the moves taken against short selling by other markets (ASX) were an extreme response.

Covered short selling is when an investor would sell a share they do not own at that point, only having a contract to hire or borrow the share for a time. This is done with the expectation that the share will soon fall in price, allowing the trader to purchase it at back at a price lower to what they sold it at.
Naked short selling is similar but the investor does not even have a contract to borrow the share, just the obligation to buy it back within three days of the sale.