Financial Review reports the Australian Securities and Investments Commission (ASIC) is targeting hedge funds in the latest ‘naked shorts’ crackdown.
The report says ASIC is concerned about short selling occurring without owning or borrowing the underlying shares, an illegal practice known as “naked” short selling.
“Hedge funds and investment banks are being ordered to produce documents to prove they are complying with short-selling regulations, as the corporate regulator redoubles its surveillance efforts amid more volatile markets set off by the global banking crisis.”
The commission is also focusing on the delayed reporting of short sales, which it says is crucial for market integrity.
Calissa Aldridge, who leads the market supervision team, said short selling was an important component of the market’s price discovery and liquidity function, but stressed it needed to be conducted “in a safe way”, especially in periods of outsized volatility.
“We have a heightened focus on short selling and a more proactive surveillance approach now because of the increases in volatility in markets and the sensitivity around US regional banks,” Ms. Aldridge said.
Naked short selling is banned to ensure that trades can be settled.
She added the requirement to have cover in place at the time of entering a short position “also helps to create a little bit of friction in the system to limit the amount of short selling in the market, which can be helpful with more extreme volatility”.
“It also acts as a sort of handbrake on the volume of shorts that we see when you’ve got these extreme moves.”
Ms. Aldridge said ASIC was working to review market participant compliance, adding that unlike in Australia, some foreign markets allowed hedge funds to “locate” shares after putting on the trade and before settlement.
Department of Justice to Double Down on Short Selling Practices
The Department of Justice (DOJ) is doubling down on short selling practices in the coming months according to a top department official, per Yahoo Finance.
The recent crisis of U.S. regional banks attracted fresh scrutiny by criminal prosecutors and regulators of short sellers, who had previously come under review in the wake of the “meme stock” craze of 2021.
Remarks on Wednesday by the chief of the Justice Department fraud section’s market integrity team was the first time that a DOJ official has talked openly about this relatively new area of focus.
Short selling, including via options, is a priority for prosecutors, Avi Perry, the chief of the market integrity team, said at a Practicing Law Institute event in New York.
“You’ll see some more activity from us involving short sellers sometime in the next few months,” he said.
Perry declined to comment further when Reuters asked for details on whether the agency expected to bring charges.
Reuters reported in recent weeks that prosecutors and other regulators are looking at short-selling activity in bank shares, which have whipsawed following three bank failures since March.
Yahoo Finance reports that the Justice Department and the U.S. Securities and Exchange Commission have been investigating potential manipulation by short sellers and hedge funds around the publication of negative research reports.
Though retail investors will be quick to point out that no proper regulation has been enforced on hedge funds to protect average investors.
“The broad probe is an example of the agency’s efforts to use data to root out potential misconduct by traders and to dig more deeply into securities markets.”
Perry also said that cases against executives who misuse corporate trading plans and spoofing remain priority areas.
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