As European stock markets continue to exhibit weakness, Spain’s stock market regulators recently banned the short-selling of stocks for the next three months. Earlier, Italy’s stock market regulators re-instituted a temporary ban on the short selling of financial stocks.
This type of short selling ban by governments is nothing new. Government regulators in many different countries have often reacted to adverse stock market conditions with similar directives.
According to Mr. Dever, "This type of action is usually taken by regulators during times of severe market declines with high volatility. Government regulators think that extreme volatility is a disruption to the orderly functioning of the market, so they often decide to “do something” in order to appease their constituents."
As with most government actions, short-selling bans fail to produce the desired outcome, and oftentimes exacerbate the situation that regulators are attempting to “fix”. Short-
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