Regulators in Spain and Italy have once again introduced temporary bans on short selling amid tumbling share prices in both countries and the record low trading of the euro against dollar.
The CNMV, Spains market regulator banned short selling on derivatives, equities and OTC instruments for three months while Consob, the Italian equivalent, applied a one week ban on 29 banking and insurance stocks.
The two countries introduced the bans in August last year as part of recommendations from the European Securities and Markets Authority (ESMA). ESMA published a paper in favor of the ban in the Eurozone, upon which Belgium, Spain, Italy and France decided to ban the activity on all financial instruments in order to stem market volatility, accrued by the instability of the Eurozone. Then, in Mid-February, most of those countries, including France and Belgium but excluding Greece, lifted their bans on short selling. In all cases, while the regulators have lifted outright bans, disclosure requirements and various restrictions on naked short selling remain in place. The Spanish regulator has admitted that the short selling ban had a detrimental effect on the markets.
Amid increasing debate about whether the bans actually stem volatility, Will Duff Gordon, research director at Markit, which recently acquired securities lending data provider Data Explorers, said financial names see no more short interest than average across their respective markets.
Markit shows that the average percentage of stock on loan for the named financial stocks is below the market average in Spain and marginally above the market average in Italy, said Duff Gordon in a research note. By comparison, the average % of stock on loan for the Stoxx 600 and Banks sector within the Index at 2.6% and 1.9% respectively. The data also show that the % of shares in lending programs for these financial stocks is also below the market average in Spain. This suggests low institutional ownership of Spanish financial stocks. In Italy, the average % of shares in lending programs for the financial stocks is slightly above the market average.
Ironically, the CNMV at the beginning of June admitted that short selling ban had a detrimental effect on the markets. In its latest report on the state of Spain’s financial markets, the Spanish regulator CMNV acknowledged that as a result of the instability, many financial firms suffered downgrades and in this context short selling was introduced to preserve market stability and guarantee its normal functioning. The fall of macroeconomic indicators and contagion risk in different markets and sectors further necessitated the need for the ban.
The CNMV report said stock prices are not linked to firms fundamentals: if short selling is applied because of a perception of worsening fundamentals of a firm, banning the activity artificially increases the net demand of securities, increasing their prices, which is incompatible with the financial stability, even if stock pricing is not linked to the actual value of the firm.
(JDC)