France bans shorters as markets bounce back

In a bid to control market volatility, France, Belgium, Italy and Spain have banned short selling, effective today. Short selling is a market maneuver whereby an investor borrows a stock he believes will decline, sells it, and then re-purchases it after a set period and returns it to its original holder. If the stock's price has declined in the interim, the short-seller is able to pocket the difference from selling high and buying low.

In announcing the move, European regulators cited the fear that short-sellers could spread rumors about a company to drive down its share-price and thus guarantee their success. The French market in particular has been hammered by unfounded rumors this week. First, it was rumored that France itself was to have its credit rating downgraded, a rumor that all three major credit rating agencies deny. There have been further rumors that key French banks are over-exposed to Greek, Italian, and Spanish debt and are undercapitalized in the event that any of these countries should default on their obligations. The share price of Société Générale, to take one example, has dropped 20% on such concerns.

The ban on short selling is to last fifteen days. Similar measures were introduced during the market turmoil of 2008 to little effect.