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The European ban on short selling might have unintended effects, experts say.
Four European countries are banning what critics call legalized gambling, or the short selling of stocks, to try to stop the precipitous crash of troubled European banks.
The step, some experts say, could instead intensify fears and ratchet up risks of another financial crisis, the Huffington Post reported.
Belgium, France, Italy and Spain have decided to impose a 15-day ban on short selling, beginning on Friday, according to a statement from the European Securities and Markets Authority released Thursday evening.
Regulators hope that the ban on short-selling in France, Italy, Spain and Belgium will reduce speculative action and curb the aggressive sell-offs that have hit markets over the past week, CNBC.com reported.
"There is absolutely no evidence that it will achieve what they want it to achieve," Nick Carn, founder of Carn Macro Advisors, told CNBC on Friday.
"It's a gesture to try and indicate that the problems are due to some kind of evil conspiracy of one type or another, part of the process that says that speculators are driving down the price of Greek debt or Italian debt. It's trying to create the same class of person to whom you can then attribute your problems," he said.
The ban on short selling echoes the 2008 financial crisis, when the Securities and Exchange Commission temporarily banned short sales in the U.S., a move that resulted in a brief rally but ultimately did little to arrest the market’s free fall, the Huffington Post reported.
Thursday’s ban in Europe could be taken as a sign of lack of confidence in the markets, say experts. Investors might interpret it as a "harbinger of disaster," and pull out of markets, worsening the effect.
In short-selling, one investor borrows stocks from another and sells them off, hoping their price will drop before she has to buy them back and return them to their original owner. If the price of the borrowed stocks does drop, the difference in price is the borrower’s profit.