Banning short selling is a tool that every stock market regulator in the world is likely to employ when the going gets tough. Never try to go for the killing by staying for price to hit zero. In a really scary scenario, your trade is frozen there is no exit until such a point as the regulator says so.
BMPS short-selling banned by Consob
BMPS is a distressed Italian Bank Banca Monte dei Paschi di Siena. It is the 3rd largest bank in Italy. Since July 2007 EUR93, it’s stock price has fallen 99.7% till date. Trading closed at EUR0.28 last night.
This is a chart from Tradingview.com going back to 2008. Even if there is not enough data from the chart you get the point.
Consob adopts a temporary ban on short selling on Banca Monte dei Paschi di Siena spa shares. The ban shall apply for the entire trading day of Wednesday 6 July 2016
Consob decided to temporary prohibit short sales on Banca Monte dei Paschi di Siena shares – BMPS (ISIN code IT0005092165).
The ban will be enforce for the entire trading session of tomorrow, Wednesday 6 July 2016, on the MTA market of Borsa Italiana.
The prohibition was adopted pursuant to Article 23 of the EU Regulation on short selling, considering the negative price change recorded by the share.
The prohibition applies to short sales backed by stock lending. This extends the scope of the prohibition of naked short selling, already in force for all shares from 1st November 2012 in accordance with the abovementioned EU Regulation.
The text of the Resolution 19653 of 5 July 2016 is available on the website http://www.consob.it/mainen/index.html.
Rome, 5 July 2016
Consob is acronym for Commissione Nazionale per le Società e la Borsa or Italian Securities and Exchange Commission.
Lesson: don’t try to stay until the party is over
In my opinion short sellers have to keep this in mind - banning short selling is a tool that every stock market regulator in the world is likely to employ when the going gets tough. This post ‘What you need to know about stock market crashes‘ written in July last year tells you what to expect when stocks are falling.
Short sellers beware. Anyone who think they can make money on the downside should take note: while authorities have no problem with irrational, exuberant buyers, they will always villianize sellers. Short selling will certainly be banned.
Coming back to BMPS, there is a lesson here – don’t try to stay until the party is over. Anyone who caught the short from July 2007 high at EUR93, from the halfway mark at EUR46.5 or at any point such as EUR10 or EUR5 should have exited the short. Never go for the killing by waiting around for price to hit zero.
Just think about it – you have an existing short position on this stock -> regulators ban short selling -> the press release doesn’t say what happens to existing shorts -> it scares you -> you got to call up your broker to find out how to exit the position.
Baseline is when the exit closes and you are trapped you are going to be really upset. In a really scary scenario, there is no exit until such a point as the regulator says so. This means that timing is against you, price might be against you.
For older stock market participants, recall the CLOB incident in 1998 where nearly 200,000 mostly Singapore investors trading Malaysia stocks through the Central Limit Order Book got their shares frozen during the Asian Financial Crisis.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."