Research suggests why the latest short selling bans won’t work
Despite new moves by some of Europe’s financial regulators to ban short selling, data services company Data Explorers points to independent research suggesting this ban will not work in the interests of investors.
Contained in a report titled Short-Selling Bans around the World: Evidence from the 2007-09 Crisis, authors Alessandro Beber of the University of Amsterdam and Marco Pagano of the Università di Napoli Federico II, found that bans implemented at the time,
– were detrimental for liquidity, especially for stocks with small market capitalization, high volatility and no listed options
– slowed down price discovery, especially in bear market phases
– failed to support stock prices, except possibly for U.S. financial stocks.
“These hurried interventions, which in many countries were selective and varied considerably in intensity and duration, were presented as measures to restore the orderly functioning of securities markets and limit unwarranted drops in securities prices,” the report says.
“However, theoretical reasons and previous evidence cast doubt on the benefits of shortselling bans, in particular for the liquidity and the price discovery function of securities markets. Since the crisis was accompanied by a steep increase in bid-ask spreads in stock markets, it is important to understand whether and to what extent short-selling bans contributed to their increase. If one were to conclude that, far from restoring “orderly market conditions” as claimed by policy makers, these interventions actually reduced market liquidity, this would be a serious indictment of their adoption, especially considering that they were enacted at a time when market participants desperately sought liquidity on stock markets, due to the freeze of the structured debt and interbank markets.”
What the paper concludes is that: “in contrast to the regulators’ hopes, the overall evidence indicates that short-selling bans have at best left stock prices unaffected, and at worst may have contributed to their decline.”
To read a copy of the research report click here