Today the ban on short selling in the European Union comes into force. It will have potentially harmful effects on market quality, while producing few benefits, argues Fidessa's Dr Christian Voigt.
During the early stages of the financial crisis, politicians
pulled every plug and threw every switch that they thought
might help to stabilise banks. As part of this process, several
European countries imposed bans on the short selling of shares
in selected financial institutions (FIs) and credit default
swaps (CDSs) for euro-area bonds.
The SEC first banned short selling on the stocks of big FIs
in the week after Lehman Brothers collapsed back in 2008.
Aggressive short selling was said to have pushed the
bank’s share price down prior to its bankruptcy.
Similarly, many European national regulators perceived short
selling to be a threat to the value of their banking assets and
government bonds, at a time when the markets needed certainty
and strength. A range of different measures were implemented,
but typically for fixed periods of time naked shorting was
banned for specific stocks. The bans have been renewed and
adapted frequently throughout the ongoing financial crisis.
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