New Delhi, Mar 30 (PTI) The World Federation of Exchanges (WFE) on Monday said the recent bans on short-selling of shares are damaging for the markets and interfere with price formation.

Several countries recently banned short-selling amid extreme volatility in the markets, triggered by the Covid-19 pandemic.

"Banning short-selling interferes with price formation, thereby increasing uncertainty. That can only artificially amplify volatility and probability of default, the opposite effect to that claimed, and hampers the ability of markets to serve the real economy," WFE CEO Nandini Sukumar said in a statement.

"It is not - and never has been - true that bans have any other, positive effect on market activity or price levels," Sukumar added.

The global industry group for exchanges as well as clearing corporations said unlike circuit breakers put in place by exchanges to slow markets down in times of stress, short-selling bans inhibit orderly markets rather than promoting them.

Circuit breakers allow participants time to assimilate information, with the effect of making trade-execution decisions more informed.

In contrast, short-selling bans prevent market participants trading as effectively as possibly, thereby making price information less accurate. Such bans consequently undermine the crucial and valuable role that exchanges play in establishing the definitive, authoritative price for financial instruments at any given time, the WFE said.

Falling prices indicate that companies are expected to be less profitable in the future. But even in a declining market, short-selling is only a small part of market activity, notably compared with sales of existing long positions, the federation said.

Short-selling bans risk reinforcing the false notion that the revaluation of prices reflects a deficiency in the market, rather than a change in the value of the asset, it added.

It said investor protection is a topic that exchanges take very seriously -- by providing the definitive, authoritative price at any given time; by requiring thorough disclosures and the fair dissemination of market-sensitive information; by policing against market manipulation and abuse; and by ensuring the integrity of the trading, clearing and settlement cycle.

It further said so long as exchanges, as front-line quasi-regulatory or self-regulatory entities, determine their markets to be fair and orderly, these financial markets should operate as normal, which includes allowing short selling to continue as usual.

"Investor protection does not imply protection from asset prices movements based on the consensus of the market in which those investors themselves are participants," WFE added.

Markets regulator Sebi, earlier this month, had said the short positions in the derivatives market cannot exceed the value of the holdings of the underlying stocks or the collaterals provided by them.

Besides, an additional position limit of Rs 500 crore was made available for the futures and options segment.

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