Spanish Ban on Shorting Stocks Is 'Crazy Stupid'

Peter Dazeley | The Images Bank | Getty Images

A ban on short-selling of all Spanish stocks for three months. A ban on short selling of Italian financial stocks for one week.

Both of these measures were taken for the same reason: to ensure "financial stability."

Why don't the regulators get what this does to markets? A short sale represents a stock that must be bought back in the future. High levels of short interest is usually viewed as a BULLISH indicator for exactly that reason.

And do they really think this will ensure "financial stability?" Did they take a look at the recent history of short-selling bans?

There was a ban on short-selling financial stocks in several countries (Spain, Italy, Belgium, France) from August 2011 to February 2012. What was the result? Trading volumes decreased during that period, as much as 10 percent, according to some estimates. That's a decrease in total equity volumes over the banned period. And that was just a ban on shorting financial stocks.

Now, the Spanish have banned short-selling of ALL stocks. This will likely lead to an even bigger decrease in trading activity.

And what was the effect of that short-selling ban? In the five months since it ended, the Spanish Ibex Index is at a nine-year low. Volumes are still down.

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