Tesla chief Elon Musk once called short sellers ‘jerks who want us to die’. AFP
Bans in some European countries on short-selling have revived debate about the merits of a trading practice that has fuelled virus-driven market crashes of late.
Temporary bans by France and other nations on betting against selected company shares reprised steps taken in the 2008 financial crisis.
The Financial Markets Authority in France said that “an urgent step” was needed as markets worldwide are pummelled by sell orders caused by the Covid-19 pandemic.
The US Securities and Exchange Commission (SEC) has rejected broader calls for total shutdowns of markets, and in the meantime automatic circuit-breakers have routinely kicked in to enforce temporary stops on plunging markets.
Short-selling is when speculators borrow a stock from a broker to sell it, in expectation of the price falling.
If the price does go down – as it is likely to do if “shorts” are in the majority – the investor can buy back the stock at the lower price in the market, return it to the broker and pocket the profit.
The risk is that the price goes up rather than down, in which case the investor faces hefty losses. But of late, markets have been a sea of red.
Tesla chief Elon Musk once called short sellers “jerks who want us to die”.
But defenders say the practice enhances market liquidity and shines scrutiny on companies.
France’s regulator banned short-selling in 92 stocks for Tuesday’s trading session, including major banks and insurers.
Similar one-day bans targeting specific companies have been instituted in Italy, Spain and Belgium in recent days as markets worldwide are pummelled by sell orders.
Longer trading restrictions could be in the works as the coronavirus pandemic enforces drastic lockdowns in numerous countries, in Europe and beyond.
French Finance Minister Bruno Le Maire said he was ready to go as “far as a month’s short-selling ban”, similar to steps announced in Spain.
No such bans seem to be coming yet in Britain or the US, although regulators did ban a particular kind of short-selling called “naked” trading for a time in 2008.
SEC chairman Jay Clayton ruled out a 9/11-style closure to give market participants a pause as the coronavirus spreads and more and more companies plead for state help.
“Markets should continue to function through times like this,” Clayton told CNBC.
“I can tell you that we have been working with the critical market infrastructure entities to make sure that their business continuity plans match up with the health and safety plans [of state and federal governments],” he said.
Quincy Krosby, chief market strategist for Prudential Financial, said markets need to find their own equilibrium, “as difficult and painful as it is”.
But she also called for another look by regulators at high-frequency trading and computer algorithms, which now dominate daily market volumes.
