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Short-selling is banned in multiple countries following major market sell-offs

By Lawrence Gash

Italy, Spain and South Korea suspend activity

Following the worst week for global markets since at least the financial crisis of 2008, regulators in numerous countries have banned short-selling on certain stocks in an attempt to restore some stability.

Although the Covid-19 virus has affected global markets since mid-January, major sell-offs only began in the past two weeks following its arrival in Europe and North America.

With Saudi Arabia and Russia engaged in an oil price war, the longest bull market in American history ending and Wall Street’s go-to fear gauge, the CBOE Volatility Index (VIX), hitting levels not seen since the global financial crisis, short-sellers have sought to gain on the uncertainty.

Airlines and cruise lines have been targeted particularly by traders betting that the shutdowns seen throughout Asia would occur in the West. The already-troubled Flybe, Europe’s largest regional airline, has entered administration as a result of the crisis, with analysts predicting further such cases.

The US president’s recent decision to ban all travel from Europe, except the British Isles, further weighed on airline stocks with Norwegian Air Shuttle plunging 23 per cent to a 15-year low.

On Friday morning Italian regulators announced a ban on the short selling of a number of 85 major stocks, including Telecom Italia and UniCredit. Spanish authorities have also suspended the shorting of 69 stocks. The UK’s Financial Conduct Authority (FCA) has also suspended the short selling of certain Spanish and Italian securities for the day.

With around $4trn of value wiped from European stocks in the past three weeks, some could argue that if these regulators wanted to bolster market stability, they have shut the stable door after the horse has bolted.

Certain Asian markets have also imposed restrictions on short-selling. With the Kospi 100 Index falling 20.41 per cent in the past month, South Korean regulators have banned the short selling of any shares listed on the Kospi, Konex and Kosdaw for six months. Meanwhile, Thailand has tightened its rules around the activity.

While some criticise short-sellers for profiting from failure and disasters, others defend them for their capacity to spot bad businesses and thus improve market efficiency.

With major European markets up between 6 and 7 per cent halfway through Friday trading thanks to central bank and government intervention, it would appear that the temporary ban has helped in the very short-term at least.

FURTHER READING: ECB president urges pan-European action to avert 2008-style financial crisis

FURTHER READING: Chinese premier prioritises employment over economic growth

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