Politicians' win is markets' loss

In response to an accelerating sell-off on 26 February, CONSOB, the Italian market regulator announced a two-day short selling ban on stocks of Banca Carige and Intesa Sanpaolo, raising the possibility of a more widespread ban in attempts to calm market volatility. But some commentators warned against such an extension, saying that the negative consequences could outweigh the benefits.

“There is significant research evidence published on the effectiveness of short selling bans, including some analysis we at SunGard did on the recent ban in Spain,” said David Lewis, EMEA head of SunGard Astec Analytics, a provider of market information solutions for the global securities financing industry. “They near universally agree that such bans produce little if any price support and cost the very investors they are trying to protect through lower liquidity and higher trading costs. Short selling bans have achieved some political benefits, but any resultant economic benefits remain unproven.”

Lewis said his biggest concern was that some other jurisdictions might apply short selling bans just to be seen to be ‘doing something’ without due regard to the financial impact of those decisions. “Short selling does not increase volatility in markets and banning it can actually increase it,” he commented. “At the very least, legislators should hold in their mind the cautionary tale that shorting stocks is not as clear-cut negative as they think. One should always be careful of allowing political necessity to dictate an economic folly.”

Lewis cited the words of Christopher Cox, chairman of the SEC during the Lehman Brothers default: “He was quoted as saying, ‘knowing what we know now, I believe on balance the commission would not do it again.’ Other jurisdictions would do well to listen to his experience.”

Following receipt of a formal EC mandate seeking technical advice on the evaluation of the effects of the Short Selling Regulation (SSR), the European Securities and Markets Authority (ESMA) published a call for evidence, inviting responses by 15 March.

The Commission’s Report on the review of SSR is due to be presented to the European Parliament and the European Council by 30 June.

By Richard Schwartz

This article first appeared in