Brussels falls short!

Ana Herrero-WallaceThe global securities markets have experienced a couple of weeks of extreme volatility. Unfortunately, just as they did in 2008, panicked politicians have once again got involved. On August 12th a ban on short-selling was announced by the primary venues in Spain, Belgium, France and Italy with the intention of taming the markets.

Short-selling occurs when traders borrow shares and sell them with the expectation that they can make money by buying them back when their value declines. The ban on ‘shorting’ with the intention of preventing market abuse and curtailing speculators could, in turn, bring less liquidity and worsen price discovery. The traders that are short will have to buy back to cover their short positions and investors that are long might not find a buyer for their shares when they decide to sell. A market needs to have all types of participants and those that ‘short’ play an important part in the ecosystem. I don’t see the need for regulators to bring in unnecessary, artificial measures. Letting markets run their natural course seems like the best way. If future short-selling bans are put in place, brokers might charge a premium for principal trades given to them by buy-side clients on a risk basis. How can that be good for the markets?

A rather ironic point made by the FT in its coverage on Friday was the fact that regulators actually lack any real understanding of how European markets function post-MiFID. They may have banned short-selling in primary markets but they failed to take into account the fact that the MTFs also trade many of the respective domestic stocks on those continental markets. Perhaps we need to send the Fragulator down to Brussels!

I have a hard time feeling confident in financial markets that continue to operate at the mercy of the regulators who can change the rules even though they appear to show little real understanding of how the markets operate.

What are your thoughts on short-selling?

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2 Responses to “Brussels falls short!”
  1. Colm Furlong says:

    Taming the markets using bans on short selling or introducing a proposed transaction (Tobin) tax make trading in the EU more expensive.

    Looks like original objectives of MiFID are now irrelevant in the face of Euro collapse. It used to be all about making the EU a more efficient and cheaper place to invest to make all of its citizens better off by attracting captial inflow. Now its about pure survival of the Euro at the onslaught of the market backlash on debt problems and poor economic fundamentals and conditions.

    The markets are dropping because the politicians are not doing anything practical to tackle the sovereign debt problem in the Eurozone and subsequently the banks look like a risk again. Every time political leaders address the press then the markets seem to go down, it reminds me of the George Bush effect where markets would tumble nearly anytime he spoke about the US economy.

    The other interesting aspect of the Tobin tax proposal is that approx 70% of the rake would come from London if the UK didn’t veto this crazy plan. Would the UK Chancellor really bow to France and Germany impose a tax on London and effect its competetiveness as a global financial hub and worse – hand over the tax rake to Brussels?

  2. Ana Herrero-Wallace says:

    I could not agree more. Politicians have a very short memory. Sweden has been the only European country to have tried a Tobin tax, which had a damaging effect. Implemented in the beginning of the 80’s, the country was not able to gain the proceeds they expected and it simply resulted in an exodus of investment away from Sweden. I hope the Franco-German team will not succeed in getting the unanimous support from the rest of members states to impose this ‘financial suicide’ into law. If so, we will only see outflows from Europe to Asia and the US.

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