Belgium, France, Italy and Spain will temporarily ban short selling of financial stocks starting Friday, in an effort to protect their banks and calm jittery markets, the European Securities and Markets Authority announced on Thursday.
Short selling is when an investor borrows shares and sells them on the expectation their value will decline and they can be bought back at a lower price. The more the price falls, the higher the profit.
“Today some authorities have decided to impose or extend existing short-selling bans in their respective countries,” the ESMA, the agency that coordinates the European Union’s market policies, said in a statement. “They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some E.U. markets.”
Each country has determined the details of their own ban, Reuters reports. France will ban short selling on 11 financial stocks for 15 days, Spain will protect 16 stocks for 15 days and Belgium will ban short selling of four financial stocks for an indefinite period. Details of the Italian ban weren't immediately available. Short selling is currently banned in Greece and Turkey.
In recent days, some European countries like France have worried that negative bets on financial stocks were prompting sell-offs. As MarketWatch notes:
The French ban will prevent creating a short position or increasing any net-short position in French securities in the financial sector, according to French regulator AMF in a statement. The order covers 11 entities, including BNP Paribas, Crédit Agricole and Société Générale.
Shares of French banks were rocked this week, in part on fears that France could lose its AAA credit rating, though surges on Thursday helped limit losses toward week’s end. The shares faced weekly losses ranging from 12% to 16%.
Market observers question whether a ban on short selling is the right move.
“It is a crisis of confidence, and when you do something like this, it shows a lack of confidence, which is exactly the opposite of what you want to say to the markets,” Robert Sloan, managing partner of S3 Partners, a firm that works with hedge funds, told the New York Times.
Other critics of the move point to the limited impact of a similar decision made by the U.S. Securities and Exchange Commission to temporarily ban short selling in 799 banks and other financial institutions four days after Lehman Brothers collapsed in September 2008. The intention was "to protect the integrity and quality of the securities market and strengthen investor confidence,” but financial stocks continued to fall, according to Reuters.
The European Commission welcomed the coordinated move by national financial market regulators, a spokeswoman said Friday.
"It is the first time such coordinated action was able to take place," she said.