Hedge funds are reacting strongly against temporary bans on short selling in four major European countries, arguing the bans won’t prevent falling markets and could actually increase volatility.
France, Italy, Belgium and Spain all imposed bans on short-selling after Societe Generale saw its stock plunge more than 20 percent at one point on Wednesday due to rumors about the French bank’s exposure to sovereign debt. All four bans went into effect today.
“We do not think these bans will help the current market situation,” said Andrew Baker, chief executive officer of the Alternative Investment Management Association, which represents more than a thousand hedge fund firms. “Past experience has shown that bans on short selling do not prevent market falls and indeed can exacerbate volatility.”
Baker added that independent academic research also supports such a conclusion. He said that only last year the Committee of European Securities Regulators recognized in an official report that legitimate short selling plays an important role in financial markets.
The European Securities and Markets Authority, the successor to the CESR, said on Thursday that national regulators imposed their bans to restrict the benefits that can be achieved from spreading false rumors.
According to Baker, market abuse, including spreading false rumors, is illegal and has always been condemned by the industry. If there is proof of market abuse, authorities should take action against the perpetrators, not impose a blanket ban on short selling, he said.
Societe Generale said it has asked France’s securities regulator, Autorite des Marches Financiers, to open an inquiry into the origin of rumors about the bank’s health.
