When share prices tumbled at record speeds in February and March, some regulators in Europe turned to a playbook used in the last two financial crises, and banned the short selling of shares.France, Spain and Italy issued one-day prohibitions against betting on falling share prices for selected companies — and then longer bans of between one and three months, applied to all stocks listed on their domestic markets. Belgium, Austria and Greece swiftly followed suit, while Esma, the pan-European regulator, demanded tighter standards on reporting of short positions. Markus Ferber, an influential European MEP, urged a co-ordinated ban across the continent.But the clampdown has been partial. Other regulators, including the UK’s Financial Conduct Authority, opted against such measures, saying it set a “high bar” for imposing bans. The German watchdog, BaFin, has said nothing publicly but has so far imposed no restrictions.The divergence has created headaches for investors and traders trying to navigate a patchwork of rules. “Everyone has different interpretations and it’s guesswork right now,” said Mark Spanbroek, vice-chairman of Epta, which represents Europe’s proprietary traders.Ivan Cosovic, founder of data group Breakout Point, which analyses hedge fund short-selling activity, said that in the wake of the various bans, “rebalancing and risk adjusting is not possible any more in [an] envisioned, uniform way.”Short selling is a practice widely used by hedge funds and involves managers borrowing shares and then selling them, hoping to buy them back later at a lower price before returning them and pocketing the difference. The practice has long been blamed for inflaming volatility during times of stress, while some complain that short-sellers callously profit from the economic misery of others. Several hedge funds made millions shorting banks such as Northern Rock in the 2007-08 crisis, for example.Earlier this month short-sellers drew a rebuke from the new Bank of England governor Andrew Bailey, the former FCA chief, who used an interview with the BBC to tell them: “Just stop what you’re doing”.The recent round of bans is an echo of 2008, when authorities faced the worst turmoil in 70 years. Aiming to stem the panic, they imposed temporary short selling bans on financial stocks. European regulators also applied bans on financial stocks in the depths of the eurozone crisis in 2011-12.But critics of the moves note that stocks continued to fall heavily for months after restrictions came into force. The FCA said there was “no evidence” that short selling had been the driver of recent drops in shares. “Most European [authorities] have not introduced such bans. Nor has the United States or any other major financial market,” the regulator pointed out. The bulk of Europe’s hedge fund industry is based in London and falls under the FCA’s remit.“A general pan-EU ban on short selling for securities traded in the EU only makes sense selectively for certain companies and sectors and even then its effectiveness is doubtful,’ said Thomas Richter, chief executive of BVI, the German funds association, whose 114 members hold €3.4tn in assets.The execution of the bans has also been haphazard. France, for example, did not make public a one-day ban until after the market had opened. Investors were unclear which stocks were included in the ban, and which were not.BaFin then put out a statement to clarify that instruments related to Euro Stoxx and MSCI indices were exempt from the prohibitions, as the shares affected by the restrictions did not exceed certain weightings within the indices.Sam Tyfield, a partner at law firm Shoosmiths in London, interpreted the update as a “powerful statement” that the German regulator “doesn’t see the advantages of the bans”.
Bans could even make matters worse. A 2011 paper from the US Federal Reserve found that curbs on short selling increased the overall costs of trading. Short sellers “are unpopular because they deliver messages that people would rather not hear,” the Fed concluded. Similarly, a 2018 study by the European Systemic Risk Board found that banned stocks were more likely to default or experience more volatility than unbanned ones.“It is not, and never has been, true that bans have any other, positive effect on market activity or price levels,” said Nandini Sukumar, chief executive of the World Federation of Exchanges, a trade association.Many regulators also accept that short selling is widely used by investors and market makers to protect themselves against sharp moves, and is an important mechanism for pricing shares. Some fund managers hedge positions that are betting on a rise, such as through a bond or a derivative trade, by balancing it with a “short” on the equity. The practice, known as pairs trading, is a common strategy. Market makers, meanwhile, complain that the restrictions mean they cannot meet Mifid rules that they supply both buy and sell quotes.“Statements by highly respected and influential politicians will fuel . . . instability, as it adds another uncertainty factor,” said Mr Spanbroek of Epta.