France, Spain Belgium and Italy yesterday banned short selling of financial stocks after seeing European banking shares fall 17% during August.
Attempts to secure a Europe-wide ban have failed, and so far the UK has declined to follow suit.
Banking shares rose across Europe, with French bank Societe Generale – which has been under severe pressure in recent weeks – gaining 5.7%, making it one of the top risers in the CAC index. Its shares plunged 15% on Wednesday amid rumours about its financial solidity.
The positive mood spread across the Channel. Royal Bank of Scotland added 1.22p, or 4.8%, to close at 26.49p. Meanwhile Lloyds Banking Group, owner of Bank of Scotland, was up 1.61p or 5% at 33.815p.
An investor shorts a stock by borrowing it from another investor and selling it with the hope of netting a profit by buying the stock back at a lower price to return it.
Edinburgh-based hedge fund manager Andrew Kelly said the rebound could prove temporary.
“The ban forces people to close out their short position and so by definition buy the stock. But that is a very short-lived phenomenon.”
Mr Kelly, who runs the Ignis Cartesian UK Equity Long/Short Fund, added that investors will be suspicious of why regulators have decided to protect banks in this way.
“From a market perspective it begs the question of why are you doing this? Do you know something that we do not?”
France has banned short selling on 11 financial stocks for 15 days. Spain said it will protect 16 stocks for 15 days. Belgium banned short selling of four financial stocks for an indefinite period. Italy’s ban covers 29 companies.
Germany already has a ban in place for naked short selling of many instruments. Restrictions on shorting remain in place in Greece and Turkey.
Elsewhere, South Korea has imposed a three-month ban while regulators in Hong Kong are also looking at a beefed-up disclosure regime.
Andrew Baker, chief executive of the Alternative Investment Management Association, which represents hedge fund managers, said: “Short selling is a legitimate market practice which helps capital markets function effectively.”
The UK previously imposed a shorting ban after British banks, notably Edinburgh-based HBOS, came under pressure.
In September 2008 the Financial Services Authority stopped investors from taking new short positions in financial stocks and told them to disclose those they already held.
The ban ended in early 2009. Currently, short sellers merely have to reveal when they have a short position of more than 0.5% of a financial institution’s shares.
The FSA said: “We have an existing short selling disclosure regime around financial stocks in place and we continue to monitor the activity in our markets accordingly. We have no current plans to introduce a short selling ban in the UK.”
