Italy bans short-selling amid market woe

Italian market regulator Consob banned the short-selling of financial stocks for a week on Monday as the bourse plunged on fears the debt crisis pounding Spain is dragging Italy into the quagmire. “Given the recent turn of events on the market, Consob has decided to reintroduce the ban on short-selling stocks in the banking and insurance-company sectors,” the regulator said in a statement. The ban, which came into affect at 1130 GMT, will last until 1600 GMT on Friday, after the stock market closes for the week. Milan’s stock exchange plunged over 5 per cent on Monday, before creeping back up to show a loss of 3.4 per cent. The bad news followed a gloomy Friday, when stocks lost over 4 per cent. The market was dragged down by the banks, which hold much of Italy’s debt and have come into the firing line as the Eurozone’s third biggest economy struggles to convince investors that it is not at risk of contagion from Spain. Consob’s ban regards both “naked” — when investors do not have the underlying shares — and “covered” short-selling — when investors do hold the stock, it said. Though Italy lifted a previous ban on covered short-selling on February 24, naked short-selling remained prohibited. In short-selling, investors are betting that a stock they will fall in price. They borrow the same stock from a broker, sell it and then buy them back later at a hopefully cheaper price to pocket the difference. In a “naked” short sale, the investor makes the deal without having access to the underlying securities, making it an even more speculative and risky trade. Supporters claim the practice allows investors a hedge against risk but critics say it only adds to the downward pressure in falling markets and serves no real purpose beyond speculative trading for short-term profit. The practice was temporarily banned in many countries at the height of the 2008 global financial crisis.