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Most of Europe extended bans on short-selling today in hopes of settling markets.As European markets dived today, however, it was clear that people weren’t impressed.
Indeed it’s surprisingly easy to trade around short-selling bans.
Investment strategist James Kostohryz says the simplest way it to short European bank stocks and bonds on foreign markets — many are traded right here in the U.S.
Another neat trick is to look up an index with a certain stock in it, then build a copy index that has everything in the original index except for the stock you want to short. Go short on the first index and long on the second one.
You can also structure derivatives that achieve the same thing as a short.
Short-selling bans are often ineffective for these and other reasons. They also can’t stop simple selling, which is the main reason that a stock goes down.
Georgetown’s James Angel tells the Christian Science Monitor: “One of the problems with the regulatory system is that it has to respond to the political system and politicians don’t necessarily understand markets. When things get turbulent, the temptation is to blame the short sellers when they’re really not the bad guy. Banning short-selling doesn’t really do any good. All it does is signal that political leaders have run out of other tools to help.”