Hedge Funds Can Resume Short-Selling Across Europe

(Bloomberg) -- Hedge funds, market-making firms and other traders across Europe can resume short-selling of equities this week after regulators lifted bans put in place when markets plunged during March’s coronavirus outbreak.

Six European countries including France, Spain, and Austria said short-selling can begin again on Tuesday as bans set to expire Monday will not be renewed. Italy’s prohibition, slated to end in June, will also now end today, as will Greek and Belgian curbs.

Muddy Waters founder Carson Block welcomed the move and predicted that any analysis on the impact of short-selling bans in Europe will show they were ultimately “unhelpful.” Since the bans were imposed, the CAC 40 index has underperformed the DAX and S&P 500, which cover markets that did not impose bans, Block said in an email, referring to France, Germany and the U.S.

The prohibitions, which had been strongly opposed by hedge funds, proprietary trading firms and Germany’s primary exchange, were put in place in mid-March when regulators said such trading could exacerbate the steep declines in equity markets.

Stephane Ekolo, an equity strategist at TFS Derivatives in London, said Monday’s move is “positive for price discovery.” He expects many stocks to revert to the negative trend they had prior to the prohibitions, as was the case after the 2008 short-selling bans.

Short-selling, in which traders sell borrowed shares to profit from any fall in price, is controversial at the best of times. Proponents say it results in a more liquid, efficient market, and alerts investors to problems at targeted firms. Opponents accuse short-sellers of destabilizing companies.

“Short-selling is an activity that is part of a well-functioning market,” Robert Ophele, chairman of France’s Autorité des Marchés Financiers, said Monday in a Bloomberg TV interview.

Ophele said the restrictions “didn’t have any detrimental effects” on the market and he looks forward to subsequent research on the effect of the bans, which covered markets hosting 60% of trading in the euro area.

John Moore, head of trading at Berkeley Capital Wealth Management, took a principled position after regulators announced the end of the bans.

“If we believe a company is overvalued, we want to be able to short it,” he said. “That’s what makes a market. We don’t think there should be any restrictions or limits on that.”

Regulators in France and Italy said on Monday that the bans are no longer needed because trading has become more normal. While volatility is higher than it was in February before the virus outbreak in Europe, the AMF said this is more a reflection of traders’ uncertainty about the future.

“We understood the rationale of the ban on short-selling in March to ‘cool down’ the markets when everyone was selling everything at the same time,” said Stephane Boujnah, chief executive officer of Euronext NV. “However, now that volatility has somewhat returned to normal and there is much more diversification across trading patterns, this is a wise decision.”

The European Securities and Markets Authority, the Paris-based regulator that oversees standards across the bloc, coordinated the end of the bans. The regulator will continue to require increased disclosure of short positions until at least June 16.

Market participants have begun eyeing which stocks might see an increase in short-selling after the bans are lifted. Jefferies analysts in a note to clients identified 25 stocks that have rallied 25% on average since the temporary restrictions were implemented in mid-March.

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