The next debate will be over whether short-selling should ever be used and this will probably be as short-lived as this ban. Put simply, it has made the City and others’ financial centres considerably more money than it has lost so is here to stay and this will remain the case no matter how strong the argument is against betting that something will fail given its inherent downsides for markets and investors.
Little benefit
The Financial Times called it a ‘knee-jerk’ reaction, adding: “Plans to ban all short selling of financial stocks in four European Union countries but not in the rest of the 27-nation bloc will sow confusion and may well fail to halt the recent downward slide in bank share prices.”
It reminded readers that lending between the banks themselves dried up completely between October and December 2008, after the short-selling ban was implemented in September.
After the events of 2008, the Investment Management Association did its own research, asking whether the ban was effective. It found that: “In the run up to the ban financial stocks were falling at much the same rate as the market as a whole. But once the ban was in place, the fall in financials accelerated, while the rest of market steadied.”
The IMA’s chief executive Richard Saunders, concluded: “So whatever drove down the price of financial stocks in 2008, it doesn’t look like it was short-selling. And banning short-selling did not seem to do much to check the declines – the stocks went into freefall anyway.
“On the basis of the evidence, the proponents of short-selling would seem to be right and the regulators wrong.”
Short-termism
As for the market consequences, Andrew Shrimpton, a member of the regulatory compliance practice at Kinetic Partners, suggests the move will reduce price volatility for a few days at best with volatility coming back after a day or two.
On top of this, he adds: “This measure will reduce the ability for banks to raise capital and increase the risk of a full blown recession in the countries that have adopted the ban.”
If the aim is to curb market volatility, there is little evidence if any that short-selling bans work and this exercise does nothing except show that regulators do not know what to do about market volatility.
A bit like Frankenstein’s monster, they have created something they now have no control over and they have no idea what to do about it – and as with the battle between market (in)efficiencies and its masters, in Mary Shelley’s classic tale, the monster outlives its creator.
Chris Alexander, head of investment strategy at BNP Paribas Wealth Management, summed it up saying: “A ban on short selling of financials – that produced ambiguous results elsewhere in 2008 – in parts of the eurozone risks looking more like panic than logic.”
