Short Selling

Wall Street Journal, 12 August 2011

Short-Sell Ban Gives Relief

Observers Say Effect Won’t Last Until Fundamentals Change

The decision of four European Union countries to ban the short-selling of bank and insurance stocks has given them a short-term lift Friday, but observers said it is unlikely to have any lasting effect unless the fundamentals behind them change.

The regulators of France, Belgium, Italy and Spain late Thursday announced a 15-day ban on the short-selling of certain financial stocks and derivatives linked to them, in response to particularly sharp falls in banking shares this week.

The action reopens a philosophical argument in Europe over the value of short-selling, a technique used to bet on falling prices. The U.K.’s Financial Services Authority conspicuously refused to go along with the initiative Thursday, while the German regulator Bafin also declined to tighten its existing regime. “We don’t see any evidence of market abuse at present,” a spokeswoman for Bafin said. The Finance Ministry in Berlin, meanwhile, said it supported the bans.

The BBC’s primer on short selling provides useful background reading with a more academic analysis being provided by Beber and Pagano at the Centre for Studies in Economics and Finance in Italy. The Beber and Pagano paper, Short-Selling Bans around the World: Evidence from the 2007-09 Crisis, concluded that bans on short-selling harmed liquidity, slowed down price discovery and generally failed to support stock prices.