ASIC takes aim at activist short-sellers

By Fergus Halliday

June 02 2021
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The Australian Securities and Investments Commission is gearing up to deal with WallStreetBets’ next gamble.

Several months after the Reddit-induced rise of GameStop’s stock price, Australia’s securities regulator has issued an official guidance on the tactics used by activist short-sellers.

According to ASIC commissioner Cathie Armour, when activist short-sellers provide accurate and meaningful new information, they can have a “positive impact” on price formation and market integrity as they may counterbalance excessive market optimism.

“However, activist short-sellers can also unfairly distort the price of a target entity’s securities, which is harmful to the integrity of our markets,” Ms Armour said.

ASIC’s Activist Short Selling information sheet explains that while activist short-selling campaigns are not new, over time, they have received more attention with online news and social media outlets providing instantaneous access to a broad audience.

“This can exacerbate the speed and depth of the market’s response to a short report,” Ms Armour said.

“Our research indicates that activist short-selling campaigns tend to target entities with complex and opaque corporate structures and accounting practices, or poor disclosure. They also tend to target companies with lower market capitalisation.”

As such, ASIC reiterated that releasing short reports during normal trading hours, drawing on unreliable information and using overly emotive language may lead activist short-sellers to fall afoul of the existing Corporations Act legislation.

The regulator advised targeted entities to seek a trading halt to respond to these sorts of incidents.

Going forward, ASIC said they are particularly focused on ‘short and distort’ campaigns and campaigns that exhibit behaviours of potential insider trading.

To that end, the document outlines a number of strategies ASIC may take in response to activist short-selling campaigns, such as engaging with market operators on the timing of trading halts or engaging with targeted entities to test the veracity of claims made by activist short-sellers.

In a situation where the activist short-seller is based abroad, ASIC said they will look to get foreign regulators involved.

“Entities should monitor activity in their industry sector and be aware of commentary that may suggest particular entities and/or sectors may be overvalued or subject to significant speculative attention,” the regulator said.

Speaking to nestegg, RMIT’s Dr Angel Zhong said that there have been a lot of debates going on as to whether activist short-sellers are market manipulators or market protectors in both academic research and industry reports.

“Some believe that activist short-sellers disrupt the market and lead to excessive volatility, whereas some research finds that activist short-sellers identify weakness/misbehaviour in companies and act upon the findings to correct prices of shares, thus also taking on the role of external monitoring,” Dr Zhong said.

“In the recent five years, activist short-selling has been on the rise in Australia. It appears that short-sellers are self-regulating their short reports. A recent activist short-selling campaign this year was launched by Viceroy targeting payments company Tyro.

“I believe that this is why ASIC is now stepping in to issue further guidance. This is a good initiative to provide clear guidance to protect both companies being the target and retail investors holding shares of target stocks,” Dr Zhong noted.

According to Dr Zhong, this is a crucial and necessary step given the increasing stock market participation by retail investors in Australia.

For more information about short selling, click here.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus Halliday

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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