Italian regulators consider short selling ban

Italian regulators have implemented temporary short selling bans before, and to do so again could make matters worse. Fidessa's Dr Christian Voigt has written for us before on the misguided thinking behind short-selling bans:

During the early stages of the financial crisis, politicians pulled every plug they could to stabilise the banking system. Several European countries panicked and imposed individual bans on the short selling of shares in selected financial institutions, and on credit default swaps for Eurozone bonds. The US Securities and Exchange Commission also banned short selling on the stocks of big financial institutions after Lehman Brothers collapsed in 2008. Aggressive short selling was thought to have pushed down Lehman’s share price prior to its bankruptcy.

Regulators perceived, without factual basis, that short selling was a threat to the value of banking assets and government bonds, just when the markets needed certainty. Typically they banned – for fixed periods of time – naked shorting of specific stocks.

But this is not a tried and tested method for stabilising share and bond prices. Far from it. A study by Alessandro Beber and Marco Padano, first released in 2009, indicated that in most countries in which short selling was prohibited between 2007 and 2009, the ban was detrimental for liquidity, especially for stocks with small capitalisation and no listed options. It slowed down price discovery, especially in bear markets, and failed to support prices. At best, according to Beber and Padono’s research, short-selling bans left stock prices unaffected. At worst, restrictions may have contributed to further declines. Thus, previous attempts at the policy delivered nothing they intended to.

(Full article)