Spain
04 April 2013
Spain repeatedly banned short selling but the measure often proved counterintuitive. SLT takes a look
Image: Shutterstock
A stone’s throw away from the White Coast—the bright strip of sand that lures locals and foreigners to Valencia for the summer—sits the main offices of Bankia SA, the Spanish banking conglomerate that formed in December 2010 to consolidate the operations of seven regional savings banks.
But while tourists may wander the streets in search of a sunny plaza, shareholders and bondholders were pulling their hair out, as news from Prime Minister Mariano Rajoy’s government said that they would be footing the bill for the restructure of the nationalised bank.
Revamping the banks, despite any political malaise it may cause, is a key part of the government’s efforts to turn the rudder of the ship back into calmer seas, but with the Bank of Spain commenting recently that the country’s economy will only sink deeper into recession this year, a sunny 2013 looks improbable.
Where shadows lie, short sellers will seize opportunity and in February Spanish regulator CNMV lifted its ban on short selling as markets rallied.
CNMV introduced a three-month suspension in July 2012 to “stabilise the volatility of the Spanish market”, extended it for another week in October, and submitted a proposal to the European Securities and Markets Authority to impose a further three-month ban, effective from November.
The regulator said that Spain’s short selling bans were in part due to an ongoing structuring process of the Spanish financial sector to cover capital needs.
The process, which was outlined in the 23 July memorandum of understanding between the European Commission, the Kingdom of Spain and the Bank of Spain, was still underway at the time that the extension was requested, and uncertainties surroundeded Spanish financial stability.
Spain lifted the ban in January as the IBEX 35 Index rallied, and the country’s banks took steps to repair their balance sheets amid deep austerity measures.
“The objective of banning short selling was to reduce market volatility during stressed conditions; which was to some extent achieved, but at the expense of liquidity,” says Alec Nelson, a specialist in securities finance at Rule Financial. “At the same time it has led to reduced investment and less exposure to Spanish markets. The stock market dropped after the ban was lifted at the end of January 2013, but this may be coincidence.”
“The objective of the bans, reducing volatility in the market during stress periods and minimising risk, was largely successful although impacted on levels of liquidity in the market. On balance the bans were probably warranted. The financial markets are still very, even overly, sensitive to news and there is still plenty of concern about Spain.”
He adds: “With more bad news, it is highly likely that Spanish markets could see rapid falls and rises—facilitated by electronic trading engines and securities lending—allowing positive view and negative view trading strategies to be executed quickly. Without securities lending, the market should move more slowly, reducing the range of market movement.”
David Lewis, who is senior vice president at SunGard Astec Analytics, said at the time of the July ban last year that it was the mark of a desperate regulator to control volatility, but was a measure that will ultimately end up being counterintuitive.
“Such bans have been shown in the past to be ineffective and indeed even counter-productive to this aim. [They] have impaired liquidity and damaged already ailing investor confidence; and have also been seen to drive short selling into other European markets.”
“While securities lending is not equal to short selling, it is a good proxy for measuring such activity, especially as we are now outside of the main dividend season. While it is a little early to see an impact from these bans on lending activity in these locales, prior evidence shows that such bans raise spreads, drive out liquidity and scare investors—presumably exactly what the regulators do not intend. For Spain and Italy, does this herald the start of their own Silly Season, perhaps?”
A SunGard report that examined the effectiveness of short selling bans looked at what happened to stocks when Spain banned short selling in 2011. The figures showed share prices continuing to slide steeply when the original ban was put in place in 2011, and falling again when it was removed in February 2012. The IBEX also rose again around the time the new ban was put into place. This happened, however, at the same time as several positive economic stories were emerging, including a significant (€100 billion) bank bail-out scheme.
Looking at a selection of Spanish financial and non-financial stocks identifies some interesting, if not surprising, effects, according to the report Figure one shows indexed values (to January 25 2013) of share prices and loan volumes.
“Bankia and Banco Popular were two banks, among many, that have been under pressure during the last 12 months,” said the report. It noted that Figure one shows the fall in value of both shares throughout the year, as well as the average share price across the Spanish banking sector.
“Note that falling share prices continued to fall once the ban had been lifted in February, followed by a short recovery after the ban was reapplied,” added the report. “This was followed by further falls from around September, closing at an index of 38 percent and 16 percent for Banco Popular and Bankia, respectively. Average bank prices, however, (including Santander, BBVA, Bankinter and others) actually rose during this period—closing at an average of 73 percent from a low of 65 percent when the ban was reapplied.”
This indicates “that if a short selling ban was indeed instrumental in a recovery in prices, it seems to have been selective in its success”, according to the report.
“It should also be noted that July saw a change in sentiment towards Spain resulting from a number of actions both domestically and across the eurozone, arguably the primary reason behind rising securities prices at that time.”
But while tourists may wander the streets in search of a sunny plaza, shareholders and bondholders were pulling their hair out, as news from Prime Minister Mariano Rajoy’s government said that they would be footing the bill for the restructure of the nationalised bank.
Revamping the banks, despite any political malaise it may cause, is a key part of the government’s efforts to turn the rudder of the ship back into calmer seas, but with the Bank of Spain commenting recently that the country’s economy will only sink deeper into recession this year, a sunny 2013 looks improbable.
Where shadows lie, short sellers will seize opportunity and in February Spanish regulator CNMV lifted its ban on short selling as markets rallied.
CNMV introduced a three-month suspension in July 2012 to “stabilise the volatility of the Spanish market”, extended it for another week in October, and submitted a proposal to the European Securities and Markets Authority to impose a further three-month ban, effective from November.
The regulator said that Spain’s short selling bans were in part due to an ongoing structuring process of the Spanish financial sector to cover capital needs.
The process, which was outlined in the 23 July memorandum of understanding between the European Commission, the Kingdom of Spain and the Bank of Spain, was still underway at the time that the extension was requested, and uncertainties surroundeded Spanish financial stability.
Spain lifted the ban in January as the IBEX 35 Index rallied, and the country’s banks took steps to repair their balance sheets amid deep austerity measures.
“The objective of banning short selling was to reduce market volatility during stressed conditions; which was to some extent achieved, but at the expense of liquidity,” says Alec Nelson, a specialist in securities finance at Rule Financial. “At the same time it has led to reduced investment and less exposure to Spanish markets. The stock market dropped after the ban was lifted at the end of January 2013, but this may be coincidence.”
“The objective of the bans, reducing volatility in the market during stress periods and minimising risk, was largely successful although impacted on levels of liquidity in the market. On balance the bans were probably warranted. The financial markets are still very, even overly, sensitive to news and there is still plenty of concern about Spain.”
He adds: “With more bad news, it is highly likely that Spanish markets could see rapid falls and rises—facilitated by electronic trading engines and securities lending—allowing positive view and negative view trading strategies to be executed quickly. Without securities lending, the market should move more slowly, reducing the range of market movement.”
David Lewis, who is senior vice president at SunGard Astec Analytics, said at the time of the July ban last year that it was the mark of a desperate regulator to control volatility, but was a measure that will ultimately end up being counterintuitive.
“Such bans have been shown in the past to be ineffective and indeed even counter-productive to this aim. [They] have impaired liquidity and damaged already ailing investor confidence; and have also been seen to drive short selling into other European markets.”
“While securities lending is not equal to short selling, it is a good proxy for measuring such activity, especially as we are now outside of the main dividend season. While it is a little early to see an impact from these bans on lending activity in these locales, prior evidence shows that such bans raise spreads, drive out liquidity and scare investors—presumably exactly what the regulators do not intend. For Spain and Italy, does this herald the start of their own Silly Season, perhaps?”
A SunGard report that examined the effectiveness of short selling bans looked at what happened to stocks when Spain banned short selling in 2011. The figures showed share prices continuing to slide steeply when the original ban was put in place in 2011, and falling again when it was removed in February 2012. The IBEX also rose again around the time the new ban was put into place. This happened, however, at the same time as several positive economic stories were emerging, including a significant (€100 billion) bank bail-out scheme.
Looking at a selection of Spanish financial and non-financial stocks identifies some interesting, if not surprising, effects, according to the report Figure one shows indexed values (to January 25 2013) of share prices and loan volumes.
“Bankia and Banco Popular were two banks, among many, that have been under pressure during the last 12 months,” said the report. It noted that Figure one shows the fall in value of both shares throughout the year, as well as the average share price across the Spanish banking sector.
“Note that falling share prices continued to fall once the ban had been lifted in February, followed by a short recovery after the ban was reapplied,” added the report. “This was followed by further falls from around September, closing at an index of 38 percent and 16 percent for Banco Popular and Bankia, respectively. Average bank prices, however, (including Santander, BBVA, Bankinter and others) actually rose during this period—closing at an average of 73 percent from a low of 65 percent when the ban was reapplied.”
This indicates “that if a short selling ban was indeed instrumental in a recovery in prices, it seems to have been selective in its success”, according to the report.
“It should also be noted that July saw a change in sentiment towards Spain resulting from a number of actions both domestically and across the eurozone, arguably the primary reason behind rising securities prices at that time.”
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