Market Overview

Profiting from European Bans on Short Selling

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France, Italy, Spain and Belgium announced that they are introducing restrictions on short selling in a fight against market volatility that they say is being caused by the abusive spread of false rumors.

French banking stocks took a hit earlier this week as rumors spread that the banks' financial positions were at risk due to exposure to the Greek government's debt.

The European Securities and Markets Authority (ESMA) released an announcement yesterday saying that it had been monitoring the situation and sharing information with the relevant national authorities.

They decided that a ban on certain short selling activities should be implemented in an effort to combat a combination of short selling and allegedly false rumors that ESMA referred to as "clearly abusive".

ESMA said in an announcement, which amusingly referred repeatedly to European authorities as "competent", that it had been monitoring the markets over the last few weeks and sharing information with European national authorities.

Perhaps more troubling than the restrictions on short selling is ESMA's statement that it would support European authorities who plan to take a stand against anyone who spreads rumors or news that they deem to be misleading about the health of the financial institutions or other European companies.

ESMA said that "given these recent market developments, ESMA wants to emphasise the requirements in the Market Abuse Directive (MAD) referring to the prohibition of the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumours and false or misleading news. European competent authorities will take a firm stance against any behaviour that breaches these requirements and ESMA will support national authorities to act swiftly against any such behaviour which is clearly punishable. While short-selling can be a valid trading strategy, when used in combination with spreading false market rumours this is clearly abusive".

How this threat against free speech will play out is still unknown but if ESMA and the European governments follow through with this threat a great many investors, journalists and average citizens could face legal threats.

There are already signs that it's not an idle warning, as French banks have threatened to sue anyone that they believe to be spreading unfounded rumors about the banks' financial health.

French Finance Minister Francois Baroin said that his government would support ESMA's efforts to ensure financial stability while fighting market abuses and speculation.

This is just the latest move by a spooked government to place restrictions on short selling, as South Korea, Greece and Turkey have recently announced similar measures.

The measures may end up having the opposite effect because investors could see them as a lack of faith by the governments in their economies.

For those who think that placing restrictions on short selling could actually be harmful, the ProShares UltraShort MSCI Europe (NYSE: EPV) ETF is worth taking a look at.

The move to restrict short selling will be seen by many investors as knee jerk reaction that addresses the symptom instead of the disease.

Any weakening in the eurozone's financial sector also puts pressure on the euro, so investors looking for a safe haven currency may want to move some of their funds into the CurrencyShares Swiss Franc Trust (NYSE: FXF) or the CurrencyShares Japanese Yen Trust (NYSE: FXY) ETFs.

On the other hand, investors who really believe that the rumors about the French banks' financial stability are just opportunistic lies spread by speculators may want to buy the iShares MSCI Europe Financials Index (Nasdaq: EUFN).

If the rumors about the French banking sector prove to be false, this ETF is likely to see its share price climb higher.

 

Related Articles (EPV + EUFN)

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Posted-In: Long Ideas News Sector ETFs Short Ideas Specialty ETFs Rumors Currency ETFs Politics

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