Financial regulators across Europe have made moves to temporarily restrict short selling of certain stocks for the second time in less than a week, as the coronavirus pandemic continues to grip markets.
Responding to recent and significant declines across Europe’s equities markets, authorities in Spain, Italy, France and the UK have all imposed bans on creating or increasing short positions on some securities.
The Autorité des Marchés Financiers in France, Financial Conduct Authority in the UK, and Italy’s Commissione Nazionale per le Società e la Borsa, have all taken action today to impose one-day bans on short selling of European stocks most impacted by the recent market declines.
Spain’s Comisión Nacional del Mercado de Valores has decided to ban short selling activity on Spanish shares for up to one month from today. The ban can be extended if needed, but may also be lifted before the one-month deadline.
Short selling, considered a risky but lucrative trading strategy mostly applied by hedge funds, is a bet that the price of a stock will fall. Short sellers borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them to the lender, pocketing the margin. In 2008 during the global financial crisis, regulators globally made similar moves to ban short selling of stocks, due to fears the trading strategy would exacerbate the steep drop in stock prices.
Earlier this week, the European Securities and Markets Authority (ESMA) demanded more information from hedge funds betting against stocks, by lowering the threshold at which investors must report to national regulators on short selling positions. ESMA said the move was made under “exceptional circumstances” linked to the ongoing coronavirus pandemic.
“The measure can support more stringent action if required to ensure the orderly functioning of EU markets, financial stability and investor protection,” ESMA added. “ESMA considers that the current circumstances constitute a serious threat to market confidence in the EU, and that the proposed measure is appropriate and proportionate to address the current threat level to EU financial markets.”