Shorting ban falls short

Banning short sales not only doesn't calm markets, it makes them choppier, a new study has found. According to Abraham Lioui, a finance professor at EDHEC Business School in Lille, France, market volatility rose sharply as a result of short-selling bans in several countries last year, including the United States. Financial market regulators in France, Spain, the United Kingdom and the United States, among others, banned short selling in financial stocks after share prices fell sharply. Most of the bans have since been lifted. "Short-sellers perhaps did not really merit the punishment that, by simply banning the shorting of the shares of financial institutions, the market authorities recently meted out," concluded the study, "The Undesirable Effects of Banning Short Sales." The study found that hedge funds, which often are tarred as abusive short-sellers, didn't earn "abnormal returns" from short selling. Average returns during the past 10 years for those that used short-sale strategies was 3%, the study found, compared with 4.75% for those using convertible arbitrage strategies and 7% for those using long-short strategies. A large majority of short-sellers are market makers who hedged their bets on options markets and weren't affected by the ban, the study found.