UniSuper has instructed its custodian to recall all shares currently out on loan indefinitely.
The $85 billion super fund has requested BNP Paribas Securities Services to suspend stock lending, effective immediately.
UniSuper said restricting the ability to short-sell is in the best interests of the market.
“In a normally functioning market we’re comfortable lending our shares as we genuinely believe that it adds to market efficiency,” UniSuper chief executive John Pearce said.
The ability to short-sell adds to liquidity and price discovery in an orderly market, he added.
“However, we are now in a market gripped by panic and we believe that restricting the ability to short-sell is in the best interest of promoting a more orderly market,” he said.
The efficacy of UniSuper’s actions will depend on how many other funds do the same, Pearce concluded.
“We are only one fund… Of course, we are not privy to the thinking of other funds who lend their stock,” he said.
On Friday, the UK’s Financial Conduct Authority temporarily prohibited short selling of certain Italian stocks in a bid to calm the market after Milan’s stock market fell 17%.
The stocks included Ferrari, Juventus and Lazio football clubs and bank Unicredit.
The move followed similar decisions by Italy’s regulator and Spain’s securities regulator Comision Nacional del Mercado de Valores (CNMV) when Madrid also suffered.