Australian Regulator Extends Ban to 'Covered' Short Selling

By Stuart Kelly


Sept. 22 (Bloomberg) -- Australia's corporate regulator extended its ban on short selling to include so-called ``covered'' transactions, following similar moves by U.S. and U.K. regulators in an attempt to alleviate volatility in the stock market.

Traders won't be allowed to transact covered short sales, in which stock is borrowed for the purposes of betting on share price declines, from the start of trading today, the Australian Securities and Investments Commission said on its Web site yesterday. It abolished so-called ``naked'' short sales, in which traders never borrow the shares, last week.

The move comes after the U.S. Securities and Exchange Commission halted short selling of financial companies in a bid to stymie speculators seeking to benefit from the credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and American International Group Inc.

``In the current climate and, in light of the actions taken by other regulators, we need a circuit breaker to assist in maintaining and restoring confidence,'' ASIC Chairman Tony D'Aloisio said in the statement. ``These measures are necessary to maintain fair and orderly markets. Because of the relatively small size and the structure of the Australian market, it is necessary to extend the prohibition to all stocks.''

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

ASIC and the Australian Securities Exchange on Sept. 19 abolished ``naked'' short selling, in which traders never borrow the shares, raising concerns that investors are flooding markets with sell orders to drive down prices.

The changes will be reviewed in 30 days, ASIC said yesterday.