Short Selling: Assessing New Zealand Essay

2969 Words 12 Pages
Short Selling: Assessing New Zealand’s regulatory regime and future development
1. Introduction
1.1 The recent global economic crisis has seen an unparallel shift in the global perception of free markets. Regulators around the world have adopted a more strict regulatory approach to markets than seen previously. Short selling is been given particular attention from authorities due to its speculative use and questionable moral nature. As in the past, “short selling has been a favourite whipping boy”.
1.2 This essay examines the current regulatory measures in place in New Zealand regarding short selling. This essay will also evaluate the policy arguments with reference to the United States of America’s regulations and the recent economic
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5. The policy rationale of regulation
5.1 Short selling regulations are usually introduced to prevent downward pressure on decreasing stock prices. Additionally, announcements about increases in short positions are empirically associated with negative information about a stock, which is then reflected in prices. Today, short selling is a common strategy for speculative purposes and a favoured hedging technique since it is often less costly than other hedging methods. Short selling is usually assessed from an investor’s prospective mainly involving prices, volatility and liquidity. However, in the interests of market efficiency and integrity, this essay will assess short selling on a larger market basis to assess the value of short selling.

5.2 The primary goal of financial markets regulation is commonly seen in the maximization of economic efficiency. Thus, regulation is justified on the basis that it corrects market failures in the interest of the public. Thus, the main reasons behind regulation have been the promotion of competiveness and protection of investors.
5.3 Any regulation incorporating these goals needs to be effective itself, i.e., it has to actually reduce the inefficiencies caused by the targeted market failures. Furthermore, even if there is a market failure, direct and indirect costs of regulation may exceed its benefits. Thus, regulations are not considered a superior outcome to market failure.

5.4 This essay will assess the main

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