Spain's stock market regulator, the Comisión Nacional del Mercado de Valores (CNMV), stopped the stock market from bleedingyesterday by putting a temporary ban on short selling trades.
The controversial decision successfully stopped the bleeding as markets recuperated slightly, ultimately giving up 1.1% on the day. The CNMV followed in the footsteps of the Italy's stock market regulator, the Consob, which also decided to put an immediately short-term ban on taking short positions in banks and insurance companies. Spain's ban will last three months and should be lifted after markets close on October 23, but could remain in place longer if the CNMV wishes.
The measure attempts to reduce intense volatility of European stocks, but it also reduces available liquidity and creates asymmetry in the markets by limiting how much stock values can drop, but not how much they can rise. The measure should calm animal spirits and slow down speculation on Spanish debt, but it won't eliminate the uncertainty that investors have about Spain's future. Banning shorts is understandable as a near-term fix, but keeping the ban in place for the long term would hurt the markets and ought to be avoided.
All said, the CNMV's measure is better than the Ministry of Finance's announcement that it would change fees on intra-day trading, which it announced last week.
