European regulators are temporarily banning short-selling on select stocks in four countries’ starting August 12, the European Securities and Markets Authority (ESMA) said August 11.
Traders in Belgium, France, Italy and Spain will not be able to short stocks.
The move is part of an effort to restore confidence in a market plagued by rumours about the credit worthiness of French banks and higher borrowing costs.
In short-selling, one investor borrows stocks from another and sells them, hoping their price will drop before she has to buy them back and return them to their original owner. If the price of the borrowed stocks does drop, the difference in price is the borrower’s profit.
Lycos Asset Management president Constantine Lycos told Business in Vancouver August 11 that he supports the EMSA’s temporary ban on short-selling, but not beyond a few months.
He strongly opposes naked short-selling, where an investor does not even need to borrow a stock before selling it. Naked short-sellers are able to sell an infinite amount of stock, thereby potentially selling more than 100% of a company’s outstanding stares.
Usually, companies set aside up to about 20% of their shares to brokers who then lend the shares to clients who potentially sell.
Lycos supports this practice as a way for investors to keep markets in check.
“Short sales, where you can borrow the stock, I have no problem with that,” he said. “It makes the market more efficient and more liquid.”
Glen Korstrom
Twitter: GlenKorstrom