The Problem with a Ban on Short Selling

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The Problem with a Ban on Short Selling

The Problem with a Ban on Short Selling



The panic that has amassed over the last couple of trading sessions was been compounded by short selling bans from both the Spanish and Italian regulators.

When investors are scrambling for the exit, many look to cover their long exposure. However, when they find that they can't hedge long positions they will often have to sell outright.

Not only are such bans counterproductive by reducing liquidity but they instil panic at a time when confidence is paramount. Perhaps more importantly, they don't prevent an asset that is doomed from being sold aggressively. The price still gets pushed lower and lower.

If a company looks like it is going to go bust then no investor is going to hang around to pick up the pieces. They are going to run for the exit faster than you can say 'sell'. No ban on shorting is going to ease the pain.

It's short sightedness such as this that prevents accurate free market pricing. Naturally, the regulators can say to the wider community that it is 'doing something' to prevent 'spivs and speculators' from driving share prices lower.

Of course it had to be the regulators of the countries that are at the epicentre of the crisis who have imposed the bans and therefore adding to the worry and uncertainty for investors.

The short selling ban comes as little surprise but begs the question, is there something they know that we don't?

Will We See More Selling?

As discussed, rising uncertainty regarding the Spanish regional governments' debt triggered fresh concerns over the European crisis yesterday. The concerns initially drove the US markets lower but they managed to bounce from their lows and that has helped prevent a wider sell off in Europe so far this morning.

The troika are due to visit Athens today to see how Greece is getting on with its reforms and its attempts to reduce the vast debt mountain.

Rumours have suggested that the IMF is making threats to stop further funding. If there are more calls for funding to stop then fearful investors may start reaching for the sell button once more.

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By Simon Denham, 24 July 2012


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