On October 19, 2012, Spain’s financial regulator the CNMV announced that it would extend its ban on short selling until October 31 and has also submitted a proposal to the European Securities and Markets Authority (ESMA) to impose a further three month ban, effective November 1, 2012. Spain's action on short selling is just the latest in a recent series of steps taking by EU members intended to deal with individual members' banking and financial woes. On September 14, Italy's regulator Consob lifted that country's short selling ban on banking and insurance stocks introduced in July. In July, Greece’s Capital Market Commission extended its short-selling ban, which has been in place since August 2011, to October 31, 2012, extending the ban again last week to January 31, 2012. Decisions to extend short selling bans by countries like Spain and Greece may not be as effective as hoped, however. Such decisions may only exacerbate financial fears, rather than allay them. This is because short selling bans may be read by some as more politically motivated than financially necessary, and can, even if unintentionally, signal a crisis of confidence with respect to these key economies just at the point they are restructuring their banking systems to make them more sound and resilient.
Short selling bans were used extensively during the 2008 financial crisis. Their ongoing use, however, may do more harm than good. The bans remove vital information from the financial markets, and
some studies have found that bans may not be effective and can lead to more volatility in the market, lower trading volume, and increased costs of liquidity. These studies have also concluded that banning short selling does not appear to prevent stock prices from falling
when firm-specific or economy-wide economic fundamentals are weak, and may merely obscure market data and impose
high costs on market participants. It has not been conclusively demonstrated that short selling is harmful during a market downturn. And it seems that the actions of Spain, Greece, and others to curtail short selling generally, or with respect to financial sector stocks, may merely send mixed signals and increase the doubt, volatility, and liquidity problems the bans are intended to manage.