European authorities have intervened in the region’s stock and bond markets with a series of measures intended to bring stability to prices, after record falls were compounded by fears that traders are reluctant to buy or sell.
Italian and Spanish market regulators have banned investors from betting against the prices of a combined 154 stocks, in a bid to calm the worst of the tumult in equities. At the same time, the London Stock Exchange has eased requirements for market makers that trade fixed-income exchange traded funds.
The moves in Madrid, Milan and London follow a dramatic intervention by the US Federal Reserve on Thursday, announcing it would supply trillions of dollars of short-term loans in an effort to ease serious disruptions in the country’s government debt market.
The decisions to prevent short selling were announced by the two countries’ national securities watchdogs late on Thursday, after equity markets in Spain and Italy registered their heaviest one-day falls in history. The Ibex 35 in Madrid fell 14 per cent and the FTSE MIB in Milan dropped 17 per cent, as investors struggled to gauge the economic impact of coronavirus and the oil price war.
However, there was a dramatic bouce in stocks on Friday. London’s FTSE 100 rose almost 7 per cent by midday in London, clawing back some ground after shedding a tenth of its value on Thursday. The Stoxx Europe 600 gained 6.5 per cent following its worst single session in history.
US stock futures hit their maximum permitted gains of 5 per cent, triggering a “limit up” mechanism designed to control wild swings. The rebound follows the largest one-day drop on Wall Street since 1987
The group of stocks investors are banned from short selling includes companies that have been hit especially hard in the recent rout. In Italy, the list of 85 shares includes large lenders such as UniCredit and Intesa Sanpaolo, as well as the automaker Fiat Chrysler, according to the Commissione Nazionale per le Società e la Borsa, the market regulator.
Spain’s Comisión Nacional del Mercado de Valores said: “The decision has been adopted taking into account the evolution of securities markets in the context of the situation arisen as a result of the Covid-19 virus. European share prices have experienced extraordinary falls.”
Spanish authorities also blocked short sales of large lenders including Banco Santander. British Airways parent IAG — which has a Spanish stock listing — was also blocked, the CNMV said.
The short selling bans are currently in effect for Friday’s trading session only.
Short selling is when investors borrow shares to sell them, hoping to buy them back later at a lower price, before returning them and pocketing the difference. The practice has sometimes been blamed for exacerbating volatility during times of stress.
During the 2008-09 financial crisis, UK and US authorities restricted such bets against financial shares that were at the centre of dramatic retreats in stock markets.
Rules were put in place after the crisis that allowed national regulators in the EU to request that other watchdogs across the bloc follow bans on short sales, if stocks are traded on platforms elsewhere. Many of Spain and Italy’s biggest companies are more actively traded in London than on their home markets.
The UK’s Financial Conduct Authority said it was acting at the request of Spanish and Italian authorities. “UK markets continue to remain orderly,” said a spokesperson for the watchdog.
Markets steadied in early trading on Friday, with the European Stoxx 600 benchmark rising about 4 per cent after a fall of 11 per cent the previous day.
In a notice on Friday, the LSE also said it would widen the maximum spread requirements for all fixed income exchange traded funds — to 5 per cent.
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Normally market makers, such as banks or high-frequency traders, are mandated to quote prices to buy and sell securities within a narrow range of the current market price. The bands are based on the type of security and its closest comparable competitors.
If there are wide price movements which make buying and selling difficult, the LSE is able to relax the requirement in able to attract more market makers. It can go up to 25 per cent in extreme circumstances.
The requirements will remain in place until further notice, the exchange said.
Trading in several bonds and funds on London’s junior Nex Exchange were also halted on Friday after their designated market maker stepped back.