Europe News

Short Sellers Remain Calm Despite Bans

Jennifer Hughes, Financial Times

Short sellers and securities lenders have remained calm in spite of controversial short selling bans for bank stocks introduced in Europe this month .

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Securities lending data show that the amount of stock on loan — used as a proxy for tracking the scale of short positions — has dropped just 0.1 percent on average since immediately before the 15-day prohibitions on shorting bank stockswere announced by France, Spain, Italy and Belgium.

Short-sellers aim to profit from price falls by borrowing stock to sell in the expectation that they will be able to buy it back more cheaply before having to return the shares.

The practice is largely the preserve of hedge funds and is a favourite target of regulators and politicians during market stress, even though studies show bans worsen trading conditions and do little to prevent share declines.

The latest figures, provided by Data Explorers, also show that on average, just 2.35 percent of each stock is on loan.

The low numbers will fuel the pro-shorting lobby’s argument that shorting is not the problem, not least because bank shares have continued to decline.

However, regulators had already claimed victory and said their aim was simply to calm markets.

“Since the ban, there has been a clear change in the volumes and volatility of the financial stocks, which now behave more or less in line with other stocks, “said Thierry Francq, secretary-general of the AMF, France’s stock market regulator.

Wild gyrations in the days before the ban on the back of rumours of liquidity strains had caused bank shares to plunge, notably sending Societe Generaledown as much as 20 percent in a single day’s trading. It was this that prompted the AMF to lead the push for a temporary ban.

Regulators have not ruled out extending the prohibitions or applying new ones if circumstances warrant.

“To be perfectly clear: our aim was to prevent market abuses based on the use of false rumours, not to stop a downward trend of the markets, which reflects negative economic expectations of investors,“ said Mr Francq.

The relative calm in the stock lending world this time is in marked contrast to the furore that greeted a wider series of restrictions introduced in 2008 in the chaos that followed the collapse of Lehman Brothers.

Then, politicians’ ire was so great that some of the biggest stock lenders — typically pension funds — suspended their loan programmes.

Academics and traders were still sceptical about the effect of the bans, however, pointing to the 2008 experience.

“The relief lasted for a few days then and did not prevent most banks underperforming — to say the least — afterwards,” said Iñigo Vega, bank analyst at CA?Cheuvreux. “I still think the ban aims to treat the symptom and not the disease. It is like trying to treat pneumonia with an aspirin.”