Should US regulators ban short-selling of bank stocks? That’s a hot topic as investors refuse to accept reassurance from the Fed chairman Jerome Powell that the recent banking crisis-that-wasn’t is over. Following JPMorgan’s rescue of First Republic, shares in other regional banks such as PacWest in Los Angeles, Western Alliance (Phoenix) and First Horizon (Memphis) have fluctuated wildly and fingers have pointed at short-sellers – who borrow shares they think are about to fall in order to sell, buy back cheaper and pocket a profit.
That’s bad, say critics, in the broad sense that it’s a negative form of investment, the reverse of backing companies you believe in; and much worse if sellers spread false rumours to push shares down. To which defenders retort that most short-sellers are serious analysts rather than cynical manipulators; that short-selling enhances liquidity and ‘price discovery’; and that profiteers who boost shares by spreading fake positive news are at least as wicked but take less flak.
Short-selling was restricted on Wall Street in 2008 and in Europe (where it’s seen as an Anglo-Saxon corruption) after the onset of Covid. But evidence is mixed as to whether banning it calms panicky markets – or whether the act of banning it would merely trigger another outburst of panic.
Stony ground
Deregulation measures proposed by the Financial Conduct Authority for the London Stock Exchange – to make it more attractive to hi-tech companies such as Arm Holdings that currently prefer New York listings – have fallen on stony ground. Writing on Spectator.co.uk, Ross Clark said the changes, which give more power to founder-entrepreneurs, ‘will put investors at greater risk’ – and the FCA itself felt obliged to make the same point. But will a less restrictive regime draw a surge of new City business?
Not, I suspect, unless it also fertilises an uplift in London share values to match what US markets offer.
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