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Europe Fights Against Equities Collapse And Bans Short Selling
Four European countries, including France, Italy, Belgium, Greece, and Spain, decided this week to ban short selling trading for a month as a way to control falling prices in the stock market around Europe due to the coronavirus crisis.
After falling considerably in the last weeks, the government of five European countries decided to ban the ability to go short in specific equities as an attempt to contain the equities bloodbath in their countries.
Remember that the short selling investing techniques involve traders selling or borrowing shares and then buying them later with the speculation they can make money when the asset loses value. So, they sell or open the position expensive and purchase equities or close the trade cheaper, making money with the difference in prices.
The French regulator said in a press note:
In the light of the outbreak of Coronavirus and its consequences on the economy and financial market in France, the Autorité des marchés financiers has decided to ban the creation or increase of short net positions with immediate effect.
The ban is applicable from 18 March 2020 at 00:00 hours until 16 April 2020 at midnight.
France's Finance Minister, Bruno Le Maire, praised he measure as a right and necessary decision. "We are ready to go further, we are ready to go up to a month, and it's a decision taken at the European level. We want to avoid speculation in the markets."
In Spain, the Comisión Nacional del Mercado de Valores, the Spanish regulator, explained what assets are included in the prohibition.
The ban covers any transaction on shares or indexes, including cash transactions, derivatives traded on trading venues or OTC derivatives which create or increase a net short position, even intra-day. A net short position for these purposes is defined in Article 3.1 of the Short Selling Regulation. The prohibition covers short sales even if they are covered by a securities loan.
Finally, the European Securities and Market Authority said that the proposed measures are justified by the current events such as the coronavirus crisis, oil war prices, and economic and health crisis around Europe. ESMA noted that the ban would restore confidence in markets and address existing threats.
After The European Short Selling Ban Decision
After the new rule entered into action, the FTSE MIB stopped a 45% decline since mid-February, and the current week the Borsa de Italia is posting a 1.77% gain.
Same story in France, where the CAC 40 fell 40% in a month before the rule, and now the index is advancing 2.08% in the week. In Spain, the Ibex 35 was 42% down since the second week of February, and now it is ready to close 2.5% positive in the current week. In Belgium, the Bel 20 declined 42% in the same period, but now it is advancing 2.03% in the week.
On Friday, most European stock indexes are trading positive with the DAX jumping 3.82%, FTSE going 1.68% up, CAC gaining 4.70% in the day, the FTXE MIB advancing 1.58%, the BEL 20 posting a 4.29% jump, and the IBEX 35 rallying 3.13%.
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