Germany’s Shorts Ban Is Not Rational, Tokyo Stock Exchange Says

Germany’s decision to ban naked short selling in an effort to calm the region’s financial markets is “not rational,” said Atsushi Saito, president of the Tokyo Stock Exchange.

“I can agree to some extent with them, with their idea to put a brake on this kind of naked short sale; but prohibition itself, I don’t think it is necessary,” said Saito in a Bloomberg television interview in Tokyo. “The ban on naked short selling is not such a rational way of thinking.”

The ban in Germany, which seeks to curb speculation on European government bonds, lasts until March 31, 2011, German financial regulator BaFin said yesterday in an e-mailed statement. Japan’s Financial Services Agency placed a ban on naked short sales in October 2008 as the global financial crisis caused stocks in Tokyo to plunge. The ban extends until July 31, the regulator said on April 23.

German Chancellor Angela Merkel is seeking to build momentum for financial-market regulation as credit-ratings downgrades of Greece, Portugal and Spain added to concern that European governments will struggle to cut their deficits. As of yesterday, the Stoxx Europe 600 Index fell 7.7 percent from this year’s high on April 15. Stocks in the index rose 4.8 percent last week and have slid 1.1 percent this week through yesterday.

The Nikkei 225 Stock Average has fallen 10 percent from its 52-week high on April 5, entering what some traders refer to as a correction. An average of 1.09 trillion yen ($11.9 billion) in shares have traded daily on the Nikkei this year, compared with 2.11 trillion yen in the same period in 2007, before the subprime mortgage meltdown.

“I agree to some extent with the idea of reducing some unnecessary short sales which create volatility,” Saito said. “But short sales can generate or create liquidity and they can help in the discovery of the right price” for the stock, he said.