Walt Lukken, the Chief Executive Officer of FIA, issued a statement calling for the continuation of short selling.
“Contrary to intentions, prohibitions on short-selling have been shown to significantly degrade market liquidity and price formation of those affected products while increasing trading costs and volatility. These bans have shown to be ineffective, and have significantly harmed market quality while causing unintended consequences on related markets. FIA joins other trade associations in opposition to calls for short selling bans being considered by government authorities.”
The FIA continued in its statement, “Lukken noted that several academic studies regarding short selling bans have shown that past prohibitions have lessened market quality without evidence that the bans relieved downward pricing pressure of these instruments. See SEC Office of Economic Analysis (2008); European Systemic Risk Board Working Paper (2016); Federal Reserve Bank of New York (2012); and The Journal of Finance (2012).
“FIA, the global leading trade organization for the futures, options and centrally cleared derivatives markets, believes in the importance of keeping markets open during the COVID-19 outbreak to ensure markets can continue to raise capital, manage risk and discover prices. FIA has created a dedicated COVID-19 webpage for members and the public to access the latest government and market information regarding the outbreak’s effect on this industry.”
FIA’s position comes about two weeks after short selling was banned in four European countries.
Here is part of a story from the Financial Times.
“Four European countries have applied temporary bans on betting against the prices of a range of shares in an attempt to calm markets shaken by coronavirus. France, Italy, Spain and Belgium said overnight that they would move to stop the short selling of hundreds of stocks listed on their markets. European markets staged a brief rebound in early morning trade in Europe, before giving up the gains by lunch time.
“France, Italy, Spain and Belgium said overnight that they would move to stop the short selling of hundreds of stocks listed on their markets. European markets staged a brief rebound in early morning trade in Europe, before giving up the gains by lunch time.”
Short selling allows traders to borrow stocks from their brokers and sell those stocks, which the trader intends to buy back later.
Short sellers are making bets that the stock in question will go down in value.
Short sellers have previously been responsible for volatility in stocks like Tesla.
Here is part of a story from Business Insider from last month.
“The market rout is good news for traders who are betting against Tesla.
“Tesla short-sellers gained more than $1.3 billion in mark-to-market profits Monday as the stock plummeted more than 10% in intraday trading, according to data from financial-analytics firm S3 Partners.
“Shares of Tesla fell 14% to an intraday low of $605 per share before trading was halted amid a broader market sell-off. Stocks moved sharply lower after Saudi Arabia slashed its crude prices following the collapse of talks between OPEC and its allies to cut oil production amid the coronavirus outbreak, sending the price of the commodity plummeting more than 30%.”