Spain – CNMV Short Selling Ban during Covid

Spain – CNMV Short Selling Ban during Covid

On 23 July 2020, ESP CNMV reported on effect of ban on Spanish markets.

  • Analysis of effect of restrictions on short selling on Spanish stocks March and May 2020.
  • Comparative analysis of evolution of shares part of Ibex 35 and German Dax 30.
  • Considers various variables (in Germany no short selling ban was applied due to Covid).
  • Study did not find remarkable evidence of effects re prices, trading volumes, volatility.
  • Depth of market or credit spreads, although moderate increase in specific measure of liquidity (bid-ask spreads) implies worsening of said variable.

Key Aspects

  • CNMV published report on analysis of effect of restrictions on short-sale operations on Spanish shares between March and May 2020.
  • Analyzed impact on market efficiency of restrictions on short-sale introduced in Spanish markets during session of 13 March 2020 and from 17 March to 18 May 2020.
  • Establishment of such restrictions intended to preserve financial stability and investor confidence in exceptional times of turbulence that can translate into price movements.
  • But this performance can affect markets efficiency; ban can, as per studies made in previous financial crisis, reduce speed at which prices adjust to available information.
  • Deteriorate some liquidity measures such as bid-ask fork or volume of negotiation.
  • It assessed impact on some liquidity measures (such as bid-ask fork, contracting volume or Amihud ratio) and also evolution and intraday price volatility.
  • Study also evaluates if ban could have influenced credit risk of financial and non-financial issuers whose securities are listed on equity markets.
  • It used variables re returns, volatilities, liquidity measures of shares listed on stock exchanges making up Ibex 35 stock index in Spain and those part of German Dax 30.
  • It chose German index because financial markets regulator did not make decision to restrict short-sale operation and also due as evolution of prices, volatility and liquidity.
  • Measures in period prior to implementation of measure in Spain was similar in both.
  • From descriptive and econometric assessments it can be deduced securities affected by ban experienced largest increase in bid-ask spreads that persisted in some extent.
  • Analysis did not find evidence of effects attributable to ban in other relevant variables e.g. contracting volumes, prices, volatility, market depth or credit spreads of issuers.