Study finds public disclosure requirements weaken market liquidity and raise barriers to efficient capital formation
Brussels, Belgium — European Union rules requiring the public identification of short sellers weaken capital markets by distorting investor behaviour, according to new research by Copenhagen Economics commissioned by MFA. The report, The Role of Short Selling in EU Capital Markets, draws on a decade of trading data across seven European markets.
“Short selling helps investors by making markets more liquid and stock prices more accurate. These benefits are essential to building the deep, competitive capital markets the EU needs to attract investment, and finance growth,” said Jillien Flores, MFA Chief Advocacy Officer. “This research shows why the EU should adopt anonymised, aggregate disclosure that preserves regulatory oversight while allowing short sellers to contribute more fully to the EU’s economic competitiveness.”
Short selling helps keep stock prices accurate by allowing investors to identify and trade against overpriced companies. It also makes markets more liquid, reducing trading costs for investors and financing costs for businesses in the EU. The report finds that the EU’s public disclosure requirements undermine these benefits in four ways:
- It discourages informed short selling. Investors avoid building large short positions to keep their identities private, limiting the information that short selling contributes to stock prices.
- It increases capital costs for businesses. The report estimates that short selling lowers EU companies’ capital costs by around €11bn a year by making markets more liquid. By discouraging short selling, the EU’s rules make it more expensive for businesses to raise capital.
- It encourages herding. Danish data show that investors increase their short positions around 2.4 times as much following a public disclosure as they do following a comparable non-public change. This herding can amplify price movements beyond what a company’s underlying value justifies.
- It increases volatility. A new disclosure is associated with roughly 2.9% higher daily stock volatility, increasing investor risk.
“The evidence is consistent across markets. Short selling helps prices reflect information and improves market liquidity,” said Ron Alquist, MFA Head of Research. “Those benefits extend to every investor and also reduce companies’ financing costs. This research shows how the EU’s public disclosure rules can undermine those benefits by changing how investors trade.”
The UK replaced named disclosure with anonymised, aggregate data in July, while the U.S. also publishes aggregate short-interest data without naming individual investors. The EU is one of the only remaining developed markets that publicly identify individual short sellers. MFA is urging the EU to follow the UK’s approach and replace named disclosure with anonymised, aggregate public data.
Read the full research paper here.
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Managed Funds Association (MFA), based in Washington, D.C., New York City, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest it, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 fund manager members, including traditional hedge funds, private credit funds, and hybrid funds, that employ a diverse set of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors diversify their investments, manage risk, and generate attractive returns throughout the economic cycle.
