“When in doubt, blame the shorts. When desperate, ban the shorts,” says Lex in the FT. Last week, Spain, Belgium, Italy and France introduced bans on short-selling financial stocks. Short sellers bet on share-price declines by borrowing stock, selling it, and hoping to profit by buying it back at a lower price.
The 15-day bans were put in place because these countries blame speculators for spreading panic by causing “a run on the share price”, says The Daily Telegraph’s Alistair Osborne. “It’s desperate stuff and… history proves it doesn’t work.”
Research spanning 17 countries from academics Marco Pagano and Alessandro Beber shows that in 2008 UK financial stocks fell faster during a ban on short selling them (lasting from mid-September to the end of the year) than in the three months before. They also underperformed the overall market. Stocks covered by the US ban underperformed the S&P 500.
Then, as now, financial stocks slid because they were so exposed to debt; investors gradually realised that the shorts were right. Banning short selling is shooting the messenger.