Looking past the European short-selling smokescreen

IN a bid to stop the rout of their respective banking sectors, France, Italy, Belgium and Spain last week put in place controls on the short selling of a number of banking stocks. The ban is for 15 days, meaning that it will expire on 26 August. Spain has also gone one step further, explicitly banning not only short cash positions, but also any position in over the counter (OTC) derivatives.

The markets have understandably reacted badly. The ban on short selling inhibits price discovery, meaning that traders will want to simply dump the stocks that they are holding as they lose the ability to see what lies beneath the surface. Last year, the Committee of European Securities Regulators, the predecessor to ESMA, said: “legitimate short selling plays an important role in financial markets. It contributes to efficient price discovery, increases market liquidity, facilitates hedging and other risk management activities and can possibly help mitigate market bubbles.”

“The short selling bans have proved in the past that they are ultimately almost ineffective in halting the slides,” says Ian O’Sullivan, head of sales at SpreadCo. “Short selling bans only apply to opening new short positions, but if you need to dump €10m worth of shares in a French bank, for example, then your order may still cause a large tumble.”

So how does this all affect spread-betters? Unfortunately, in this instance spread betters are still bound by the same rules that apply to those that hold the underlying stock. According to Jamie Blake, sales account manager for London Capital Group: “If a client of ours tries to short the controlled stocks there will be a message displayed stating that there are restrictions on selling into this market.” However, clients will still be allowed to sell out of a position, and to take a short to reduce a long position.

In past bans, traders have come up with any number of ingenious synthetic positions, buying puts and selling calls on the same position. But getting exposure to the controlled banking stocks is also possible for spread betters. According to Mike van Dulken, head of research for Accendo Markets: “with CFDs and spread bets, we still offer short positions on major indices as they are over-the-counter and not futures contracts, which have expiry dates. This means that you can theoretically have some short exposure to banks – which are usually heavily weighted in the indices – by shorting the indices themselves.” Spread betters can also go beyond this and short the index and then buy every other component, or ETFs of every other sector in the index, leaving you with only a short position on the banks. Traders should note that this is not possible with Spanish banks due to the explicit ban on shorting OTCs.

Despite the controls on certain stocks, it seems that spread betters aren’t left short of ways to short.