Echoes of the last financial crisis are ringing around global markets as a series of national regulators have begun to implement short selling bans in response to the coronavirus pandemic.
Exchanges across some of the worst hit areas in Asia and Europe were moved to follow orders from their watchdogs on Friday, March 13, after a bloodbath in global markets reminiscent of 2008 resulted in record levels of decline.
South Korea was the first to act, banning short selling for six months. It is the first time Korean regulator has prohibited short-selling since August 2011, when the eurozone crisis triggered another huge selloff.
Korea presently bans for a day the short selling of Kospi stocks that show a turnover rate of six times (five times for Kosdaq stocks) and a price fall of more than 10 percent. Short sellers seek to profit by selling borrowed shares and buying them back later at a lower price, and is usually led by foreign companies.
In Korea, prior to the ban, daily short-sale turnover jumped 28 percent to average 509 billion won ($424 million) in February. Korean stocks tumbled by more than 4 percent with foreign selling on the main Kospi hitting a record 1.3 trillion won.
Shorting had soared in Korea after the virus struck the country in late February.
The epicenter of the European coronavirus outbreak, Italy, also implemented a short-selling ban applicable to 85 stocks as its markets took a beating. The country’s FTSE.MIB index plunged by 17 percent on Thursday, the worst decline of any European index.
Neighbors Spain, which is also struggling to contain the killer virus, said that its short-selling prohibition would apply to 69 specific stocks, including all of those whose share prices dropped by more than 10 percent a day earlier. The country’s benchmark IBEX 35 index was down 14 percent on Thursday.
Later in the day, the UK’s Financial Conduct Authority, which regulates trading in London, outlawed the shorting of more than 140 major Italian and Spanish stocks, including banks, and soccer clubs Juventus and Lazio.
The one-day ban also covered shares in Italian carmakers Fiat Chrysler and Ferrari, Unicredit bank and drinks firm Campari Group. Spanish banks Santander and Sabadell, and the airplane manufacturer Airbus, which is listed in Spain, France and Germany, are among those on the list.
As a result, the ban impacts the shorting of fashion brand Moncler, the tire company Pirelli, the insurer Generali and a number of Italian banks, including Mediobanca and Banca dei Monte Paschi di Siena. Both Spanish and Italian regulators urged London to extend the ban following market volatility.
“We received a request from the Italian and Spanish authorities to assist with a short-selling ban in their markets where secondary trading may occur in London,” the FCA said. “In line with our normal practice, we are assisting those jurisdictions. UK markets continue to remain orderly. The FCA continues to monitor the situation.”
Both the London and New York markets also suffered their worst day since the Black Monday crash of October 1987.
Global markets tumbled through March amid fears over the global spread of the new coronavirus, with the selloff exacerbated by short-sellers betting on a market drop. Wall Street and London endured their worst session since the 1987 Black Monday crash before stocks began to recover following a promise of fiscal stimulus.
Neil Wilson, the chief market analyst for Markets.com, said short sellers were not to blame for the latest turmoil.
“When trouble strikes, policymakers like to fall back on old playbooks, like banning short selling of shares,” he said. “We see this kind of action occasionally when markets spasm and the recent rout fits the bill. US regulators banned short selling of bank stocks during the great financial crisis of 2008-09, while similar steps were taken during the height of the 2010-11 European sovereign debt crisis. Short selling is not the problem. The policy response is pointless but the Mib is up now, leading European markets higher.”