Industry commentators suggest previous experience of banning short selling shows it does not bring greater stability, with some even warning that it could increase the risk of recession.
Industry experts warn that EU's quartet ban on short selling will not stabilise markets in the medium term, with one commentator having a bearish view that the ban could increase the risk of a full-blown recession in the countries that have adopted it. France, Italy, Spain and Belgium banned short selling of the shares of banks and other financial companies for 15 days in response to sharp share price falls this week. The ban has provided an immediate boost to financials shares, with European markets recovering from significant losses yesterday (11 August) afternoon to record modest gains led by a late surge in banking sector stocks.
Despite this boost, however, Andrew Shrimpton of financial advisory firm, Kinetic Partners, claimed the ban will only reduce price volatility for a few days "at best". He said: "As demonstrated in 2008, when similar bans were in place, volatility increases after a day or so because liquidity in the stocks is significantly reduced. This measure will reduce the ability for banks to raise capital and increase the risk of a full-blown recession in the countries that have adopted the ban".
Ryan Hughes, senior fund manager for Skandia, agreed with the 2008 comparison, stating that a ban "sometimes has an immediate effect" but "once the market smells blood, it rarely lets go". He said: "A ban on short selling has been introduced before in late 2008/early 2009; I think it was a 30-day ban but some lasted longer. It did take the heat out of the situation immediately but fundamental problems won't go away in that time”.
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