(CN) – New restrictions on short sales took effect in several European countries Friday, making it harder for investors to bet that stock prices will fall.
The European Securities and Markets Authority, which describes itself as “ensuring the integrity, transparency, efficiency and orderly functioning of securities markets,” released a statement Thursday night announcing the regulations.
“Today some authorities have decided to impose or extend existing short-selling bans in their respective countries,” the statement said. “They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets.”
France banned short selling or increasing short-selling positions for the next 15 days in 11 of its markets. Italy, Spain and Belgium enacted similar bans, though Belgium’s restrictions are indefinite. European financial powerhouses Britain and Germany did not join Friday’s ban, while Greece and Turkey have bans already in place.
EU regulators have been discussing a continentwide ban, citing regulatory dilemmas for neighboring markets since stymied investors will frequently take their bearish strategy to countries without bans.
The actions are, at least in rhetoric, intended to prevent negative speculation from augmenting market declines.
“While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive,” the European Securities and Markets Authority said in its statement.
Short-position holders borrow shares and immediately sell, hoping the price will go down so that they fulfill their obligation to buy at a lower price.
But economists differ on the effects of short-sales on overall market health. The sales can provide important information about investors’ confidence in company. Hedge funds, which frequently combine positive and negative trading strategies, can also be hurt by the bans.
Additionally, when markets fall, short sellers look to cash in profits. To do so, they must purchase shares that can stabilize prices.
The short-sale debate is alive in the United States as well. European regulators have pressured the nation to adopt international standards that would restrict short sales.
As securities plummeted in 2008, the Securities and Exchange Commission tried to offset market volatility by banning short sales for three weeks in September. SEC chief Christopher Cox later told Reuters that the maneuver affected the market in unforeseen ways, and that it would not attempt it again.
In February 2010, the SEC voted 3-2 to restrict short sales on rapidly falling stocks. Any stock whose price has fallen at least 10 percent during a trading session can only be shorted at a higher price than the best bid price available at the time.
The rule effectively forces short sellers to wait until actual owners who want to sell the stock get the opportunity.