The FSMA prohibition of Short Selling in the Wake of Coronavirus

A guestpost by Fahad Al-Sadoon (student KU Leuven and University Zurich)

Short selling is an investment strategy, where an investor will borrow a security (typically from a broker-dealer or an institutional investor, such as a mutual fund), at current price and will immediately sell it. Later on, when the security’s price (hopefully) has declined, the investor will buy it back at the new price. The difference between the two prices is the profit of the investor[i]. In other words, it is a practice used by investors to speculate on the decline in a stock or other securities prices. If generalized, it will concretely induce a price decline of a security. Some might argue that the fact that an important number of investors are shorting a stock is only the genuine indication that the latter is overvalued, while for others massively shorting a stock can turn into a self-fulfilling prophecy on the stock exchange.

Unbridled short selling has been blamed by governments and some economists for exacerbating volatility during times of stress. Indeed, some would say that it can contribute to price declines in the securities of financial institutions, in a manner that is unrelated to the true price valuation[ii]. Some extreme forms of short selling can even use false rumours in order to manipulate the market and obtain the targeted (reduced) price[iii]. As a consequence, during the financial turmoil of 2008 a plethora of regulators in several countries temporarily banned short selling on certain stocks in order to improve investor confidence and reduce volatility[iv].

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According to the FSMA, the outbreak of Covid-19 pandemic is at the source of substantial selling pressure and unusual volatility in the price of shares of financial institutions. As a consequence, some investors might be tempted to take new positions in order to profit from a future price decrease, which might in turn accelerate the falls already experienced in the past days and aggravate the current economic disturbance seriously. Thus, the FSMA has decided to take the following measures in a specific timeline: Continue reading “The FSMA prohibition of Short Selling in the Wake of Coronavirus”