Short Sellers Getting Short Shrift?
by Paul Springer
A short selling ban lifted European markets at the end of the week, but the regulatory move – which has yet to prove successful for any market in which it has been tried – may just be providing short-term comfort at the expense of fair and liquid trading.
The temporary U.S. short selling ban on some 799 banks during the global financial crisis gave preferential treatment to one industry and rewarded poor management. It also did not prevent their stock prices from falling.
While it’s not surprising to hear poorly managed microcaps blaming their woes on short sellers, it’s pretty pathetic when a big, badly run bank makes the same pitch to politicians — and gets away with it.
Even the regulators had their regrets, as CNBC notes:
At the end of his tenure as chairman of the Securities and Exchange Commission, Christopher Cox said the biggest mistake of his term was to implement a three-week ban on short-selling bank stocks at the height of the financial crisis in 2008.
With the U.S. ban in the rear view mirror, to some it looks like it was part of a “too rich to fail” policy that spared banks from price discovery that should have been allowed to take place.
Some banks effectively used the bailout and shorting ban to stabilize, but now we’re seeing the gradual implosion of some perhaps should have been put out of their misery.
But European markets loved the ban today. Dow Jones correspondents did not find monolithic support of the idea, about which traders and bankers expressed doubts. “While the ban on short selling equities may support share prices for a day or two, unfortunately it is highly unlikely to prevent a further selloff,” ETX Capital senior trader Manoj Ladwa told Dow Jones.
The European ban covers much ground but seems better organized than the U.S. efforts, The Financial Times says:
The ban affects equities, convertibles and equity derivatives of more than 60 bank, insurance and financial companies in Belgium, France, Italy and Spain. Credit default swaps, a form of insurance against default that are linked to debt, are not included.
At the same time, The Times and others found a variety of critics. “Everything says that the short-sale bans don’t have very much effect other than creating turmoil and uncertainty in the market. . . It takes liquidity out of the market and has pernicious effects without really accomplishing much,” a hedge fund manager told The Times.
The Guardian surveys commentary on the ban. One respondent, Atif Latif of Guardian Stockbrokers actually felt the move could have unexpected consequences:
After 15 days then what happens? This can have the opposite intended effect by volumes being decreased and pricing being more volatile. Not shorting banks is clear but last time there was confusion regarding “financial companies” classification, same again.
BGC Partners’ David Buik had stronger views:
Until the EU’s politicians wake up to the fact that there is a stench of fear and uncertainty in the air, much of it down to their ineptness, markets will continue to behave irrationally with seismic levels of volatility . . . [the ban] may also make investors even more nervous about the debilitating state of European banks‘ balance sheets.
In contrast to the recent four nation ban, Reuters notes, Germany took its own steps. This nation banned naked short selling only, allowing covered shorting to continue. This leads to the real problem: naked shorting is allowed in the EEU.
Maybe what needs to happen is for all parties to follow the U.S. trend towards making naked shorting illegal. If it’s legal to sell unlimited quantities of stock without controls, any company can be pounded into the ground regardless of market conditions.
In the meantime, Europe’s ban will make it difficult to know what some of these banks are worth. If they aren’t worth nearly what they appear, it might be better to find out sooner rather than later.
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