Lost in translation

Yesterday the CNMV (the Spanish regulator) and CONSOB (the Italian regulator) banned any short selling (naked or covered) in their respective markets.

It is becoming more and more difficult to believe that these bans are imposed as a measure of good market regulation and not due to unrelated political considerations. On that point, a new study by Ian W. Marsh and Richard Payne analysed the UK short sell ban in 2008/9 and concluded that: “the ban had detrimental effects on the quality of UK equity markets and that, far from being stabilising, the ban exacerbated problems of volatility in the prices of and uncertainty in the values of UK financial stocks.”

But before judging the recent bans, let’s get the facts straight. CNMV (Spain) published a brief statement in English in which it said:

  • The ban starts immediately (23rd July) and will last for 3 months
  • It includes all stocks admitted to trading in a Spanish regulated market and all derivatives in regulated markets or OTC derivatives that have the effect of creating a net short position
  • Market making is exempt
  • It was “extreme volatility” that led them to their decision

However, the study by Marsh and Payne shows that a short sale ban will increase rather than decrease volatility, so either the researchers or the regulators are not getting their facts straight.

Based on yesterday’s CONSOB statement I had to apply the little Italian I’ve picked up over the years and managed to ascertain that the ban starts immediately (23rd July) and will last until 27th July. Today, though, we finally have an English translation.

So the regulators have implemented a highly controversial piece of regulation without any warning and created massive uncertainty. Aside from the language barrier, many detailed questions (e.g. how is market making defined in the context of that ban?) remain unanswered. This hardly seems like the best way to calm the markets.

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