ECJ advocate general argues against ban on short selling

[JURIST] The European Court of Justice (ECJ) advocate general on Thursday denounced the decision by the European Securities and Markets Authority (ESMA) [official websites] to ban the short selling of stocks. Affirmed on nearly 80 percent of final judgments [Telegraph report], the ECJ's advocate general, Niilo Jaaskinen, rejected the measure for lack of contribution to market harmonization and overreaching on the part of the European Union. Jaaskinen claims that the decision should be based on a unanimous vote among member states. The European Commission and ESMA have made no comment [Reuters report] on Jaaskinen's statement.

Short selling has been the target of much criticism, particularly following the recent financial crisis. In 2009 the US Securities and Exchange Commission [official website] made permanent [JURIST report] a temporary ban on the so-called "naked" short selling of stocks. In a normal short sale, a trader borrows and sells a stock, promising to buy it back at a certain price in the future, but in a "naked" short sale, the trader doesn't actually borrow the stock before selling it. In its release announcing the retention of the rule, the SEC said that allowing the practice often left traders in a position where they could not deliver the stock, which would artificially drive down its value.

 

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