The chief executive of the London Stock Exchange has launched a stinging attack on the German government's unilateral decision to ban so-called "naked" short-selling in some financial stocks and bonds.
In an interview with an Italian newspaper, Xavier Rolet described the ban as a "mistaken decision that risks having an effect which is the opposite of what is desired". He continued: "I would, in fact, suggest to eliminate the ban. And then to construct market infrastructure that helps investors. Markets are global: you can't think of acting unilaterally because it would be counterproductive."
A spokesman for the exchange later confirmed that the comments – in business daily Il Sole 24 Ore – tied in with the LSE's view that short-selling is a legitimate market practice that helps with the formation of prices and the provision of crucial liquidity to markets. The LSE has undertaken research which found that a temporary ban on short-selling bank stocks in Britain – imposed by the Financial Services Authority at the height of the financial crisis – served to squeeze liquidity in banking shares.
Liquidity is the degree of trading activity in a stock or market, and is crucial to investors – only with sufficient trading liquidity can they be sure that they can buy into or sell out of a particular stock when they need to.
Short-selling involves betting on price falls in, for example, share prices by borrowing shares in a company and selling them in the hope of buying them back at a cheaper price. Naked short-selling is controversial because the "sell" orders are placed by traders before they have even ascertained whether they can first borrow the shares. Critics say it is used by speculators as a means of driving down prices as part of an "attack" on vulnerable companies or bonds.
Germany's ban sparked a panic on the financial markets because it took investors by surprise and fuelled fears about what might be behind it. It also caused consternation among some of the country's trading partners, including the US.
Mr Rolet was hired by the LSE, which owns Italy's main stock exchange, the Milan Bourse, to lead a turnaround of the business. He notched a notable success recently when Project Turquoise – the pan-European share-trading platform it controls – overtook rivals' trading volumes after they suffered problems with the "leakage" of confidential data.