US Should Adopt Germany's Short-Selling Bans: Spiropoulos
Germany's ban on certain types short sellling should be adopted in the United States to prevent the type of volatility that hurts investor confidence, Bill Spiropoulos, CEO of Corestates Capital Advisors, told CNBC Thursday.
“When you see stocks being blasted with flash trading, it destroys market confidence," Spiropoulos said.
"They have absolutely no interest in investing.” Germany banned naked short selling in euro-zone bonds, credit default swaps and certain financial stocks.
Naked short selling is when the seller doesn’t actually own the underlying security at the time the deal is done and has been criticized for making highly stressful financial circumstances worse.
Executives Lehman Brothers and Bear Stearns pointed to short sellers for undo pressure on their sotcks, and more recently, the Greek government has blamed credit default speculators for worsening their economic situation.
"The roller-coaster activity makes people run to the sidelines, they have no interest in investing,” Spiropoulos said.
Stopping “Bear Raids”
“I absolutely think they should pull those boys back from bear raids," he added.
"It turns the marketplace into a casino, just like in the 1930s. They used to run a stock from $50 to zero and there was no one there to stop them.”
Proponents of short selling argue that they provide a valuable warning signal to alert other market participants of potential problems. Selling also creates a two-way market for asset prices, and increases liquidity.
But Spiropoulos did not take issue with what he said he considers legitimate short sellers, focusing more on sellers he said attempt to take advantage of the system.
“If you’re a market maker, that’s a different story. Liquidity, taking positions, moving money, hedging, … that’s not a problem.”
Watch the video of Spiropoulos' interview on CNBC
“But when you see these waves of selling, what’s the purpose? Who’s responsible? Are they pushing prices down to fill their pockets? I got a problem with that,” he said.
Experts have told CNBC the ban on naked credit default swaps may not be enforceable, as over-the-counter trades are conducted off exchanges, and most CDS markets are located in London and New York.
The move could backfire, causing markets to doubt the credibility of the instruments banned, as it did on Wednesday, when the euro fell sharply and stocks dropped on news of Germany’s new regulations.
But Spiropoulos reiterated the need for the ban in America.
“I think there should be collars, so when markets become extreme and highly charged, there needs to be some kind of cooling mechanism,” he said.
“I think stability and fairness – especially in the highly regarded markets such as New York – these markets have to operate on fairness,” he added.