Regulators in Italy and Spain have reintroduced short selling bans in equities, citing “extreme volatility” resulting from the European debt crisis.
Last year both countries banned short selling during a period of market volatility but the bans were lifted in February. In Spain, the new ban is on all stocks or indices – including cash equities transactions, derivatives in regulated markets or OTC derivatives – and will run for three months, while in Italy the prohibition will apply for one week and only concern banking and insurance securities.
Short selling – trading borrowed shares and buying them back at a lower price – has attracted negative political attention with the practice often blamed for contributing to stock market falls.
Italy’s regulator, Consob, said the ban had been introduced to ensure the “orderly conduct of trading and the protection of investors” and avoid the threat of serious turmoil in financial markets caused by high volatility and a significant drop in share prices.
Both regulators have exempted market makers from the bans, letting them incur a net short position either in response or as a hedge to a client order, or as a result of quoting bid and ask prices.
Spain’s ban last year coincided with a 10% gain for financial stocks covered; however, these same stocks have fallen by 40% since the ban was lifted in February, according to Bloomberg.
Pan-European securities regulator the European Securities and Markets Authority (ESMA) published its technical advice on short selling in April this year. The document sets out a methodology for determining whether stocks have fallen sufficiently to justify consideration of a short selling ban, using a 10% fall in liquid shares as a benchmark. The document also sets out legal definitions for which counterparties should be affected and sets out the principle of exemptions for market makers engaged in legitimate market activity.
Earlier this month, Spain’s IBEX 35 Index experienced its worst two-session intraday decline since 2008, sparking fears of a crash.