02.27.2013
By Terry Flanagan

Market Users Rile at Italian Short-Selling Ban

The temporary banning of short-selling major Italian bank shares on Milan’s exchanges following the inconclusive election result in the country has been criticized by market practitioners.

Consob, the Italian securities regulator, has suspended short-selling in shares of Banco Popolare, Mediolanum, Banca Carige and Intesa Sanpaolo for the entire trading day today after shares plunged in Italian banks following the departure of prime minister Mario Monti and the growing prospect of a hung parliament or even another election.

Short-selling bans are generally brought in to bring back a modicum of stability to markets, but many market users believe they don’t usually achieve this aim at all.

“Short selling does not increase volatility in markets and banning it can actually increase it,” said David Lewis, EMEA head of Astec Analytics at SunGard in London, a trading and technology company.

“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.

“They say in war that the wrong action is usually better than inaction. Perhaps this is the case here. The argument that things would be worse without a short-selling ban in place has been levied—but it is nearly impossible to isolate such individual effects on a market under pressure.”

Short-selling bans in Europe have been imposed by Spain, Italy, Belgium, Greece and France at various times in the past 18 months to counter eurozone debt crisis flare-ups.

While the European Securities and Markets Authority, the pan-European securities regulator, has, since November, put in place new rules to support the creation of a level playing field across Europe regarding short-selling. This is the reason why the U.K.’s Financial Services Authority has backed Consob’s move today by also temporarily banning the short selling of the four Italian bank stocks on all U.K. exchanges.

“Many European countries have previously imposed bans on short selling,” said Lewis. “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 Securities and Exchange Commission during the Lehman Brothers default [in 2008] 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.”

The Italian election results, which saw no conclusive victor and a comic-turned-politician with no discernible policies called Beppe Grillo receive 25% of the popular vote, has shaken the temporary early-year buoyancy of markets in Europe. “Italy is the world’s third biggest debtor and the outgoing premier, Monti, has for the last two years driven austerity policies to the forefront of his regime with an aim of cutting €20billion of the country’s debt,” said Edward Bland, a market expert for Duncan Lawrie Private Bank, a boutique U.K. bank. “Now, the people have spoken and the elections show that effectively half of the Italian electorate are against Monti’s technocratic austerity measures.

“The election outcome is destabilizing for Europe and it raises questions about Italy’s commitment to further reforms necessary to reduce debt. The climate of uncertainty in the wake of the election deters investors and this may overhang European markets in the short term. “With no clear indication of a straightforward answer, the big question is how long the government will be held in this state of deadlock. And how long therefore, the markets will suffer.”

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