European regulators, spooked by downward-spiraling stock markets in European Union bourses, took the unusual step on Thursday of banning “short selling” in France, Spain, Italy and Belgium.
According to a statement by the European Securities and Markets Authority, which regulates EU market policy,
Today some authorities have decided to impose or extend existing short-selling bans in their respective countries. 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.
All four countries affected by the ban are struggling with huge debt problems, and regulators no doubt felt that a restriction on short sales may, in turn, short-circuit any market panic heading into the weekend.
In the short term, at least, the gambit seems to have worked. In Friday trading, the Stoxx Europe 600 Index jumped about 2% as U.S. investors woke up to survey the market landscape.
Short selling isn’t all that complicated: The goal is to buy low and sell high — only in reverse. It involves first selling a stock or a commodity that the seller does not own. Usually, short sellers “borrow” the securities from a broker with a promise to return it or pay for it at a later date. If, as hoped, the price declines, the short seller can buy the security at the lower price, return the borrowed shares, and pocket the difference.
In effect, short sellers bet that stocks will fall — and some argue that the practice actually encourages stocks to fall. So European countries felt compelled to stop the practice.
Is the United States likely to do the same?
Probably not. Economists and Wall Street analysts widely view such bans as an acknowledgement that regulators have lost control over the financial markets. “The short-sale ban really smacks of desperation,” notes Kenneth S. Rogoff, a professor of economics at Harvard, in an August 12 interview with The New York Times. “That’s their plan for solving the euro debt crisis? I mean, this isn’t going to buy them much time.”