Why ban short selling stocks?

JEREMY HOBSON: Now let’s get to what’s going on in Europe this morning. Four European countries have responded to this week’s market swings with a ban. France, Spain, Italy and Belgium have temporarily prohibited so-called ‘short selling’ of bank stocks.

Marketplace’s Stephen Beard reports from London.

STEPHEN BEARD: Buy short selling speculators can bet that the price of certain shares will go down. They sell the shares which they don’t own, buy them back at a lower price, and then pocket the difference. The French government claims that this activity was behind the steep falls in some French bank shares this week. There were rumors that some of the banks were in trouble and France might lose its AAA credit rating. The rumors were later denied. The French say that a ban on short selling will calm the markets and prevent speculators from profiting on false rumors.

Richard Hunter is an analyst with British stockbrokers Hargreaves Landsdowne. He’s doubtful of the effect of such a ban.

RICHARD HUNTER: There is very little evidence that it does work. If we look back at 2008 when the U.S. and U.K. did try it on financials, the drop in financial share prices was simply over a longer period of time.

Only four countries have imposed the ban. The other 22 members of the European Union, including Britain, have refused to follow suit. The U.S. says it will not be imposing a ban, either.

In London, I’m Stephen Beard for Marketplace.