Focus on southern Europe – Shorting bans harm liquidity, says Invesco trader

Short selling bans generally reduce market liquidity, and typically do not fulfill the purpose of their design by aiding it, according to the global head of equity trading at $640bn investor Invesco.

Kevin Cronin (pictured) said “the selling pressure does not necessarily go away” just because curbs are put on the practice.

This has been the real-world experience of previous moratoria, including those instituted mainly around financial stocks in late 2008.

It seems also to have been the case also for Spain and Italy, which controversially banned the building of fresh short equity positions in various of their stocks on Monday evening, for three months and one week respectively.

Immediately following Spain’s ban, its stock market slid a further 190 points, or about 3%, over two days, although it rallied yesterday.

Since the ban, Italy’s shares fell 200 points, or 1.6%, over two days, though they then rallied yesterday.

Some of yesterday’s rally, benefiting short-ban banks heavily, was no doubt due in part to the statement of European Central Bank President Mario Draghi, that policy makers would do whatever it takes to save the euro.

Invesco’s Cronin suggested short sale bans could inhibit legitimate portfolio hedging activities that managers undertake for the benefit of their clients.

“Our concern for clients is, sometimes shorting activity is related to hedging risk in client portfolios. For our clients we have to be able to do some short selling of indices and so on, and if you are not able to sell the entire basket of securities because of a short ban, it can become quite complex.”

A series of academic papers have cast doubt over the effectiveness of the bans, which nevertheless typically win popular support, as short selling can be portrayed as fuelling stock price falls – as it was widely described for bank shares in the direct wake of Lehman Brothers’ collapse in September 2008.

At least 14 regulators globally instituted shorting bans of varying breadth and duration back then – from limits on fresh short positions in financial stocks in countries such as the UK, US and Germany, to market-wide vetoes in Australia.

Cronin said he understood that bans could be engaged to stop ‘bear raids’, “but you have to realise also that there is a consequence to doing that”.

Invesco runs $640bn in global equities.


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