Key Takeaways
- • Copenhagen Economics research commissioned by the Managed Funds Association (MFA) concludes that EU rules requiring public identification of short sellers weaken capital markets by distorting investor behaviour.
- • The report estimates short selling lowers EU companies' capital costs by around €11bn a year through greater market liquidity, a benefit the report says public disclosure undermines.
- • Danish data show investors increase short positions about 2.4 times as much after a public disclosure as after a comparable non-public change, which the report links to herding.
- • A new public disclosure is associated with roughly 2.9% higher daily stock volatility, according to the study.
- • MFA is urging the EU to replace named disclosure with anonymised, aggregate public data, following the UK's July shift to that model.
Summary
A new study commissioned by the Managed Funds Association (MFA) and conducted by Copenhagen Economics argues that European Union rules requiring the public identification of short sellers weaken European capital markets by distorting investor behaviour. The report, titled The Role of Short Selling in EU Capital Markets, draws on a decade of trading data across seven European markets.
The research identifies four channels through which the EU's public disclosure requirements undermine the benefits of short selling. First, the report finds that disclosure discourages informed short selling, as investors avoid building large short positions to keep their identities private, which limits the information short selling contributes to stock prices. Second, it estimates that short selling lowers EU companies' capital costs by around €11bn a year by making markets more liquid, and argues that discouraging short selling raises the cost of capital for businesses. Third, the report cites Danish data showing investors increase their short positions around 2.4 times as much following a public disclosure as following a comparable non-public change, a pattern it says can amplify price movements beyond what underlying value justifies. Fourth, a new disclosure is associated with roughly 2.9% higher daily stock volatility.
Jillien Flores, MFA Chief Advocacy Officer, said short selling helps investors by making markets more liquid and stock prices more accurate, and argued that the EU should adopt anonymised, aggregate disclosure that preserves regulatory oversight. Ron Alquist, MFA Head of Research, said the evidence is consistent across markets.
The report notes that the UK replaced named disclosure with anonymised, aggregate data in July, and that the U.S. publishes aggregate short-interest data without naming individual investors. The EU is described as one of the only remaining developed markets that publicly identify individual short sellers. MFA is urging the EU to follow the UK's approach.
The research identifies four channels through which the EU's public disclosure requirements undermine the benefits of short selling. First, the report finds that disclosure discourages informed short selling, as investors avoid building large short positions to keep their identities private, which limits the information short selling contributes to stock prices. Second, it estimates that short selling lowers EU companies' capital costs by around €11bn a year by making markets more liquid, and argues that discouraging short selling raises the cost of capital for businesses. Third, the report cites Danish data showing investors increase their short positions around 2.4 times as much following a public disclosure as following a comparable non-public change, a pattern it says can amplify price movements beyond what underlying value justifies. Fourth, a new disclosure is associated with roughly 2.9% higher daily stock volatility.
Jillien Flores, MFA Chief Advocacy Officer, said short selling helps investors by making markets more liquid and stock prices more accurate, and argued that the EU should adopt anonymised, aggregate disclosure that preserves regulatory oversight. Ron Alquist, MFA Head of Research, said the evidence is consistent across markets.
The report notes that the UK replaced named disclosure with anonymised, aggregate data in July, and that the U.S. publishes aggregate short-interest data without naming individual investors. The EU is described as one of the only remaining developed markets that publicly identify individual short sellers. MFA is urging the EU to follow the UK's approach.
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