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Italy's 'Panic': Why a Ban on Shorting Would Fail

by Jeff Cox, Senior Writer
Publication: CNBC

February 26, 2013


The following is an excerpt from a CNBC article that mentions research conducted by Finance professors Robert Battalio and Paul Schultz on a short-selling ban. To read the entire article visit: Italy's 'Panic': Why a Ban on Shorting Would Fail

You can almost set your watch by it: A global event sends markets into turmoil, and shortly thereafter a regulator steps in to talk about a ban on short-selling.

So it came as little surprise that on the heels of the Italian election turmoil the country's regulator, the Commissione Nazionale per le Societa e la Borsa, or Consob, floated suggestions to prohibit shorting in the hope it would prevent the market from tanking.

....

But previous bans have been ineffective and often achieve the opposite of their intention.

The seminal study of how shorting bans go wrong came from the New York Federal Reserve, which examined a similar move as the financial crisis struck in September 2008. The 2012 study, authored by Robert Battalio, Hamid Mehran and Paul Schultz, concluded that short-selling bans in the U.S. and elsewhere proved costly and ineffective.

"The bans had little impact on stock prices," the study said. "Even with the bans in place, prices continued to fall. At the same time, the bans lowered market liquidity and increased trading costs."