The Italian stock market regulator Consob is considering imposing a ban on short selling to calm volatile markets following yesterdays election result. The result caused Italian equities to plunge nearly 5% at the open while Italian credit spreads spiked.
It has been reported that debt-ridden Italy is headed for a political stalemate after no group emerged as a clear winner after the vote.
The suggestions from the regulator have caused concern from within the securities industry with experts commenting that short selling does not increase volatility in markets and banning it can actually increase it.
Commenting on the possibility of a short selling ban, David Lewis, EMEA head of SunGard Astec Analytics said: Bans on short selling are often politically driven and usually a sign of underlying economic problems. Many studies have shown that such bans do little to support share prices whilst damaging liquidity and widening spreads which are both bad news for investors. Short selling allows proper price discovery and is part and parcel of an efficient capital market.
Many European countries have previously imposed bans on short selling. Our own study of the short selling bans in Spain (which were finally lifted at the end of January) showed there was no real change in the volatility of the market for the duration of the ban. It also showed little correlation between the direction of share price movement and the subsequent imposition of a ban.
At the very least, legislators should hold in their mind the cautionary tale that shorting stocks is not as clear-cut negative as they think. One should always be careful of allowing political necessity to dictate an economic folly. Christopher Cox, the Chairman of the SEC during the Lehman Brothers default was quoted as saying knowing what we know now, I believe on balance the commission would not do it again. Other jurisdictions would do well to listen to his experience.
(JDC)