EUROPEAN UNION: ESMA Study Shows Impact of Short Selling Disclosures on Investor Behaviour

Friday April 13 2018

On 13^th April 2018, the European Securities Market Authority (ESMA) published a study on the impact of short selling disclosures on investor behaviour.

ESMA’s latest Trends, Risks, Vulnerabilities (TRV) Report No. 1, 2018, analysed net short positions reported under the Short-Selling Regulation (SSR).

The SSR data shows that there were 210,341 net short positions reported from January 2013 to December 2016. These net short positions related to over 2,000 European shares, the majority being UK and German securities. The ESMA analysis reveals that around 1,000 different investors are active in EU shares, with the large majority of them being domiciled in the US (40%), the UK (30%), and only 15% in the rest of EU. In addition, short-selling activities appear highly concentrated, with 150 investors accounting for more than 80% of all reported short positions.

The ESMA study also provides evidence that investors seem to avoid crossing the public disclosure threshold in order to keep their strategy secret. The evidence gathered also indicates that disclosure to the public of significant net short positions might, as a side effect, re-inforce herd behaviour in short-selling activities.

The analysis of net short positions in EU shares shows that public disclosure influences the market outcome of short positions below and above the 0.5% disclosure threshold.

First, the threshold imposes a constraint on short selling that is binding for investors who avoid publicly disclosing a net short position in a particular share, i.e. investors who aim to keep their strategy secret from other investors. Jank et al. (2016) documented stronger negative returns for German stocks shorted by these secretive investors, suggesting that the concealment of a short position is associated with superior information.

Public disclosure can increase pricing efficiency by bringing transparency when positions are disclosed by informed investors. However, it also seems to reinforce herd behaviour, with disclosure leading to follow-on disclosures by other investors. One question raised in the literature but not addressed here is whether short sellers might use public disclosure to manipulate share prices by influencing others and profit from large price declines (so-called “bear raids”). Using public SSR data from three countries, Jones et al. (2016) found no evidence of this.

The current notification and public disclosure thresholds provide meaningful information both to regulators for supervisory purposes and to the market for transparency purposes. Nonetheless, further research on the potential externalities of the public disclosure threshold would be needed to increase public understanding of the impact of the threshold.

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