European fund managers led a chorus of criticism of a two-week short-selling ban slapped on four euro zone stock markets on Friday, with restrictions seen more likely to nurture erratic trading than eliminate it.

Regulators in France, Spain, Belgium and Italy have vetoed trades by market participants who profit from market anxiety by betting on falling share prices in a bid to diffuse volatility and repair confidence.

But a crackdown on speculative short-selling is unlikely to arrest a wave of selling by institutional investors who have decided they have little stomach for big holdings in euro zone banks and indebted governments who might call on them again for emergency capital.

Putting a little Band-Aid on a wound that needs many stitches won't solve the issue. All that it'll do is reduce the credibility of the person who had the Band-Aid idea, said Pedro de Noronha, managing partner at hedge fund manager Noster Capital.

Mutual fund managers have exited bank stocks and bonds in droves in recent weeks to counter a repeat of the blistering criticisms that they responded too slowly to the vagaries of 2008, losing their clients billions of euros in the process.

They have been unimpressed with the euro zone efforts to tackle soaring funding costs for Europe's weakest economies with piecemeal policies such as bond-purchasing programs that threaten the vitality of its strongest members.

I can see the logic of why they are selling, said Carl Astorri, global head of economics and asset strategy at Coutts, part of Britain's Royal Bank Scotland.

We have been underweight financials in Europe and financials globally for a long time, and we don't yet want to get involved. We'll stay out, and we can see why others would want to follow us in that, he said.

By 1118 GMT (7:18 a.m. EDT), French lender Societe Generale was up 1.6 percent, and Spain's BBVA had gained 2.9 percent, while Italy's Intesa Sanpaolo was down 0.75 percent.

But one London-based equity trader said many trading firms had pared back activities because they were waiting to hear from the various regulators if they qualify for short-selling exemptions as market-makers.

Trading is very thin this morning, but that's because of the confusion, which is to be expected when regulators make rulings at 11pm the night before, the trader said.


Ironically, the ban is likely to have little effect on hedge funds, who are mostly sticking with their holdings in bank stocks and have few short positions on financials.

However, for the few hedge funds shorting European banks, the ban could actually force them to sell stocks as managers often match a short position with a long position -- buying a stock -- on another stock in the same sector.

If the fund is forced to close a short position, it may also have to sell the stock it owned, which could further push down financial stocks.

I think that hedge funds have little influence in the market at the moment, one European trader said.

Most of the selling comes from long funds, people who invested a lot in the market and are fearful amidst the current uncertainty. Investors didn't see much guidance from European officials on what the ECB and the European Financial Stability Fund will actually do. If there was a clear sustainable plan, the market would buy it.

Industry bodies were quick to reiterate 2010 research findings from academics at the University of Amsterdam and the University of Naples Federico II, which showed short-selling restrictions during the 2008 crisis were in fact detrimental to liquidity and broadly failed to support stock values.

We regret these actions, said Andrew Baker, CEO of hedge fund industry group AIMA (the Alternative Investment Management Association).

It was only last year that the Committee of European Securities Regulators, the predecessor to ESMA, recognized in an official report that 'legitimate short selling plays an important role in financial markets. It contributes to efficient price discovery, increases market liquidity, facilitates hedging and other risk management activities and can possibly help mitigate market bubbles', Baker added.

Ion-Marc Valahu, who helps run Geneva-based fund management firm ClairInvest, said he doubted the short-selling ban would provide much of a crutch for jittery markets in the long term.

In the short-term it will help calm things down, but if you look at what happened at Lehman during the crisis, it didn't do much, said Valahu.

You can still short futures and options, he added.

(Additional reporting by Luke Jeffs, Sophie Sassard and Sudip Kargupta; Editing by Will Waterman)