Why the European Short Sale Ban Won't Work

By Todd Harrison The following is the "Public Statement" from the European Securities and Markets Authority: ESMA promotes harmonized regulatory action on short-selling in the EU European financial markets have been very volatile over recent weeks. The developments have raised concerns for securities markets regulators across the European Union. ESMA has been actively monitor-ing the markets over the last few weeks and has been exchanging information with national competent authorities on the functioning of the markets and the market infrastructure.

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Given these recent market developments, ESMA wants to emphasize the requirements in the Market Abuse Directive (MAD) referring to the prohibition of the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumors and false or misleading news. European competent authorities will take a firm stance against any behavior that breaches these requirements and ESMA will support national authorities to act swiftly against any such behavior which is clearly punishable. While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive. (To read Todd Harrison's piece on whether the next war will be bulletless, click here.)

In the area of short-selling regulation, many authorities already have either requirements for the disclosure of net short positions and/or bans of certain types of short sales in place. Recent developments have meant that all competent authorities have reinforced the monitoring of their markets and are keeping their regulatory requirements under review. ESMA has coordinated discussions between the national competent authorities, specifically on the content and timing of any possible additional measures necessary to maintain orderly markets.

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Today some authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets. These measures have been aligned as far as possible in the absence of a common EU legal frame-work in the area of short-selling and given the very different national legal bases on which such measures can be taken.

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