Six European Union member states have announced that they will end the ban on short-selling shares that they introduced in the midst of the panicked manic sell-off triggered by the Covid-19 crisis in March.
The European Securities and Markets Authority (ESMA), the euro zone’s securities watchdog, has announced that Belgium, France, Spain, Greece and Austria have decided not to renew the measures, which expire at 21:59 GMT on Monday.
The expiration date for Italy’s ban is not until mid-June, however, the third largest economy in the bloc has brought this forward in order to align with its neighbours.
As markets have cooled, regulators have come under increased pressure to lift their unusual restrictions. The World Federation of Exchanges, the Managed Funds Association, the European Principal Traders Association and AIMA, the hedge fund industry association, stated in a joint letter to the French AMF:
“Over the longer term, the bans risk undermining confidence in key European financial markets and hampering the goal of a Capital Markets Union, something that will be vital to European recovery from the profound economic shock caused by COVID-19.”
Recognising this shift, the French regulator said: “Markets have partly reduced their losses, trading volumes and volatility have returned to levels that are still high compared to mid-February, however this reflects market participants’ uncertainties in the current context.”
Not all of the measures imposed have been lifted this week. ESMA is still requiring holders of net short positions in shares to inform their national regulator if the position reaches or exceeds 0.1 per cent of the issue share capital.
Although by no means unheard of, the suspension of short-selling is a controversial measure. Those who implemented the bans hoped to limit the ability of seemingly vulturous traders to take advantage of crises, who could thus potentially worsen wider investor sentiment through their actions, predicated on disaster.
Defenders of the practice argue that if it is legitimate for traders and investors to bet on assets appreciating in value, then the converse is also fair. From this point of view short-sellers are not vultures but essential players in the world of investment, improving market efficiency.
The announcement will be welcomed by traders who have had to deal with multiple separate sets of varying regulation in what is supposed to be a unified pan-European stock market of 27 nations.
Towards the end of Monday trading the Euro Stoxx 50 stands up 4 per cent, after a more than 110 point gain.