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http://www.nytimes.com/2011/08/12/business/global/...tml?ref=businessBy LOUISE STORY and STEPHEN CASTLE
Published: August 11, 2011
A European market regulator announced Thursday night that short-selling of stocks in several countries would be temporarily banned in an effort to stop the tailspin in the markets.
The move may put pressure on United States market regulators to ban short sales as well. American bank stocks have been volatile all week as global investors expressed concerns that problems in Europe might cross the ocean.
The European Securities and Markets Authority, a body that coordinates the European Union’s market policies, said in a statement that short sales — negative bets on stocks — would be curtailed in France, Belgium, Italy and Spain effective Friday. There is already a temporary short-sale ban in Greece and Turkey.
“Today some authorities have decided to impose or extend existing short-selling bans in their respective countries,” the authority said. “They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close interlinkage between some E.U. markets.”
In France, that country’s market watchdog banned short-selling or increasing short-selling positions, effective immediately, for 15 days on 11 financial institutions. They are: the April Group, Axa, BNP Paribas, CIC, CNP Assurances, Crédit Agricole, Euler Hermès, Natixis, Paris Ré, Scor and Société Générale.
The European authority’s statement said that details for each country would be posted on the Web sites of their individual financial regulators.
The emergency measures are raising comparisons to the financial crisis of 2008, when the United States and many other governments banned short sales on many financial stocks.
European financial regulators have been discussing a Continent-wide ban over the last few days amid fears from governments like France that the short sales were driving a panic. Financial regulators held two conference calls on Thursday to complete the declaration, according to a government official with knowledge of the talks. Britain and Germany are among the countries that did not join the ban.
In short sales, a trader sells borrowed shares in hopes that they will decline in value before he has to buy them back to close out his loan. The difference in price is his profit, or loss.
Critics say short-selling encourages speculation and pushes stock prices down, sometimes feeding on itself in a panicked market. Advocates say it provides important information about investor views on companies, and also maintains liquidity.
Financial historians warned that the bans in 2008 did not work and that such measures were often driven more by political concerns — the need to display some form of decisive action — than by proved market theories.
“The short-sale ban really smacks of desperation,” said Kenneth S. Rogoff, a professor of economics at Harvard. “That’s their plan for solving the euro debt crisis? I mean, this isn’t going to buy them much time.”
The crisis in Europe, Mr. Rogoff said, goes far beyond falling stock prices and has more to do with the state of banks there, including banks in Italy and France. He said the sovereign debt problems were an extension of the stress on the system created by the banking crisis.
The increasing number of European governments that are banning short-selling puts United States regulators in a tricky position. Investors with negative views on bank stocks who are forced to close their negative bets in Europe might shift them to American banks.
On Thursday, stocks in the United States continued their seesaw ride, surging 4 percent, buoyed by hopeful data on initial jobless claims. The cost of insurance on several United States banks like Bank of America and Citigroup has gone up this week, according to Markit, a financial data company, indicating that investors are growing more negative on these companies.
The short-selling announcement in Europe stirred some immediate criticism.
“It is a crisis of confidence, and when you do something like this, it shows a lack of confidence, which is exactly the opposite of what you want to say to the markets,” said Robert Sloan, managing partner of S3 Partners, a firm that helps hedge funds manage relationships with their brokers.
Back in 2008, European and United States officials coordinated temporary bans on shorting financial stocks.
Hedge funds, in particular, were hurt by the ban back then because it interfered with trading strategies that paired negative bets with positive ones.
It is impossible to know whether the panic of 2008 would have been worse without the ban, which protected companies like Goldman Sachs and Morgan Stanley, but general studies of short-selling have found that bans on that activity can lead to more volatility in the market and lower trading volume, according to Andrew W. Lo, a professor at the Massachusetts Institute of Technology.
Mr. Lo said that banning short-selling also removed important information about what investors thought about the financial health of companies, and suggested that the bans served mainly political purposes.
“It’s a bit like suggesting we take heart patients in the emergency room off of the heart monitor because you don’t want to make doctors and nurses anxious about the patient,” he said.
Some investors have been anticipating for months that a short-selling ban might occur and were pre-emptively getting out of their short positions, said Mr. Sloan of S3 Partners. He also said that if there were more short-sellers in the market now, the markets might be falling less than they are. That is because as markets fall, short-sellers often close their positions to cash in profits, and to do so they have to purchase shares to cash out. The markets could use these sorts of buyers now, Mr. Sloan said.
Even with the European countries’ bans on short sales of some stocks, investors who have negative opinions on companies may still find ways to bet against them in the derivatives market, if those sorts of trades remain allowed.
Liz Alderman contributed reporting.
A version of this article appeared in print on August 12, 2011, on page B1 of the New York edition with the headline: Seeking Safety in a Perilous Market: 4 European Nations Act to Curtail Stock Short-Selling.
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