Will The U.S. Ban Short Sellers To Protect Markets?

As markets plummet around the globe, Malaysia, Belgium, France, Italy, and Spain have all banned the short-selling of some stocks to stanch the market bleeding. The bold moves that halted the short-selling overseas have led some to wonder whether the United States and Canadian regulators may impose similar restrictions to ensure market stability.

Dutch regulators are said to also be monitoring financial markets for possible trading restrictions should the need arise.

For now, the European Union is asking hedge funds to share more information when they’re betting on a stock’s decline. Traders must also let regulators know if their net short positions rise to the level of 0.1 percent of a company’s net share capital, Bloomberg reported, citing the European Securities and Markets Authority. Previous requirements required funds to notify when they held 0.2 percent in short positions.

That the United States could impose a ban or tighter restrictions on short selling is not out of the realm of possibility. In September 2008, the United States SEC banned short sales for almost 1,000 financial company stocks “to protect the integrity and quality of the securities market and strengthen investor confidence.”

But this time around, oil-related stocks are enticing traders to bet against them, and short-sellers are making a killing. In Malaysia, oil and gas stocks were the target of a one-day short-selling ban earlier this month as oil prices plummeted.

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As of a few weeks ago, short-selling on oil had tripled since the start of the year, according to Bloomberg. Since then, oil prices have fallen further.

A ban on short selling oil stocks would nix market manipulation and, as the story would go, restore equilibrium to the market. Proponents of short-selling bans in difficult markets argue that rampant short-selling contributes to a stock market price slump, while opponents of bans argue that it is a necessary market tool for adding liquidity to the market.

With oil prices down more than 17 percent on Wednesday alone, it will certainly be something the regulators in the U.S. and Canada are considering.

By Julianne Geiger for Oilprice.com

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