France, Italy, Spain, Belgium Ban Short Selling

European markets fell into the grip of volatility after Standard & Poor's downgrade of the US last week. Photo by EPA/BGNES

Four European countries - France, Italy, Spain and Belgium - have decided to impose or extend existing short-selling bans in a bid to reign in the wild market volatility, regulators announced.

"They have done so either to restrict the benefits that can be achieved from spreading false rumors or to achieve a regulatory level playing field, given the close interlinkage between some EU markets," the European Securities and Markets Authority said in a statement.

Short selling occurs when brokers borrow shares and sell them with an expectation of making money on the shares' decline in value. France and Spain announced that their short-selling bans will last for 15 days, and could be extended, if deemed necessary.

Jean-Paul Servais, chairman of the Financial Services and Markets Authority, which modifies the rules of short selling, said the ban was imposed "in the light of the high level of volatility that financial markets are currently seeing, and out of a concern for consistency with the actions of other regulators" in Europe.

The Alternative Investment Management Association, an association of hedge funds, slammed the ban as ineffective and emphasized that short selling is a "legitimate market practice."

"We do not think these bans will help the current market situation," said Andrew Baker, chief executive of the association, in a statement. "Past experience has shown that bans on short selling do not prevent market falls and indeed can exacerbate volatility."

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