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Selling Ban will hit Derivatives

It's a certainty that the ban on short selling will decrease the transaction volume in derivatives. The strategic use of derivatives creating short positions and escalating volatility in the markets will for a little while be curtailed. Unfortunately this is only the case in financial services firm's shares but nevertheless this is a significant percentage of the market, now treated differently to the majority.

The ban on short selling will create a similar market to that of the early seventies where bear positions where covered by stock borrowing or Contangos. There will be no use of derivatives to create short positions and the trader will have to try and close out any bear positions during the day. This is a unique opportunity to analyse the impact on the market of short selling and how derivative strategies really affect it.

There will of course be a distinct lack of liquidity in financial stocks which will slow down activity and probably stabilise the share price and this of course, is the objective. The amount of derivatives transactions should equally fall and it will be interesting to see if the activity is transferred to other stocks.

We have a great chance now to monitor closely the use of short selling and derivative strategies on a sector of the financial market and the results could be extremely valuable in building protective measures once the market returns to normal.

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Gary Wright

Gary Wright

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BISS Research

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19 Sep 2007

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London

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