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Why the European Short Sale Ban Won't Work


We've seen this movie before

The following is the "Public Statement" from the European Securities and Markets Authority:

ESMA promotes harmonized regulatory action on short-selling in the EU European financial markets have been very volatile over recent weeks. The developments have raised concerns for securities markets regulators across the European Union. ESMA has been actively monitor-ing the markets over the last few weeks and has been exchanging information with national competent authorities on the functioning of the markets and the market infrastructure.

Given these recent market developments, ESMA wants to emphasize the requirements in the Market Abuse Directive (MAD) referring to the prohibition of the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumors and false or misleading news. European competent authorities will take a firm stance against any behavior that breaches these requirements and ESMA will support national authorities to act swiftly against any such behavior which is clearly punishable. While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive.

In the area of short-selling regulation, many authorities already have either requirements for the disclosure of net short positions and/or bans of certain types of short sales in place. Recent developments have meant that all competent authorities have reinforced the monitoring of their markets and are keeping their regulatory requirements under review. ESMA has coordinated discussions between the national competent authorities, specifically on the content and timing of any possible additional measures necessary to maintain orderly markets.

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 rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets. These measures have been aligned as far as possible in the absence of a common EU legal frame-work in the area of short-selling and given the very different national legal bases on which such measures can be taken.

The following countries have today announced or will shortly announce new bans on short-selling or on short positions: Belgium, France, Italy and Spain. Information on these measures can be retrieved from the websites of the relevant competent authorities. The measures will take effect as of 12 August 2011."

There are a lot of ways we can view this, included but not limited to The War on Capitalism, Martial Law for the Markets and Back in the U.S.S.A (the latter two links were our take when we saw similar measures implemented stateside-and, after a knee-jerk rally, they clearly backfired).

However, that's not what stands out; for me, the second bold sentence highlighted above-"These measures have been aligned as far as possible in the absence of a common EU legal frame-work in the area of short-selling and given the very different national legal bases on which such measures can be taken"-is, in my view, the single most important statement in the announcement.

Peter Atwater summed it up best in his Buzz & Banter post that was posted this morning:

To me the real news was not the short selling ban in Europe, but the fact that the ban was arranged on a country by country basis, despite EU opposition. Isolationism, protectionism and dis-integration are not single events but a death by a thousand cuts and yesterday's action is another example of countries saying "After me, you come first."

The "after me, you come first" attitude will most certainly percolate, as short sellers-which is a VERY different discussion than those lumped into "spreading false rumors and illegally profiting" (who should be punished)-channel their aggression to countries not protected by this selective ban, which will serve to further divide the eurozone. We've been talking about this for some time, which doesn't make it right.

But let's be honest folks; short-sellers didn't run up their deficits to the point where, in many cases, they owe more than they make. That was a secular trend that took many years to mount; they did so consciously, and it's been cumulative. To wag a finger and place blame makes me wonder if they're still in the denial phase, which is of course followed by migration and panic in the emotional continuum (and yes, I understand that some of these bourses are down 20-25% in two weeks).

I will also note that, in my view, much of yesterday's rally was in anticipation of a euro-wide short sale ban-which is freaky to even write!-so be careful about chasing stocks on this news only, as much of it is likely baked in the cake.

I'll be back with some Random Thoughts shortly; as always, I hope this finds you well.


Twitter: @todd_harrison

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