Chapter 12 - Regulating Short Selling: The European Framework and Regulatory Arbitrage

Abstract

This chapter examines and compares the European regulatory interventions after the 2008–2009 financial crisis to investigate their effectiveness and to show how these policies affected the decisions of financial advisors, as well as the market processes among European countries. A majority of European countries introduced restrictions on short selling activities during the months of September and October 2008 and their range and number of restricted assets were partly diverse with different durations. Some countries, such as the Czech Republic, Finland, Hungary, Poland, Slovenia, and Sweden, however did not introduce any type of restriction. On average, restrictions were delayed by 13 days after the Lehman collapse, and the heterogeneity affected the European market equality as well as the opportunistic behavior of several financial players. United Kingdom, Germany, France, and Italy enforced restrictions for short sellers with varying measures, which ranged from a ban on net short positions to the prohibition of both naked and covered short selling. The process followed by financial market authorities in Europe to initiate short selling restrictions brought about the primary question concerning the possible existence of cost asymmetries among heterogeneous financial firms. The analysis of European regulation not only shows a relevant discrepancy in start and end dates, but also a set of features where the rules could be bypassed by large financial firms by managing or placing short sale orders from different countries.