Short Selling Regulation Research Articles

A Study on the Short Selling Regulation

A Study on the Short Selling Regulation

A Study on the Effectiveness of Short-selling Regulation using Artificial Markets

Since the subprime mortgage crisis in the United Sates, stock markets around the world have crashed, revealing their instability. To stem the decline in stock prices, short-selling regulations have been implemented in many markets. However, their effectiveness remains unclear. In this paper, we discuss the effectiveness of short-selling regulation using artificial markets which is an agent-based model of financial markets. We indicate that the short-term regulation contributes to the market stability because of the prevention of the decline in stock price but the long-term regulation inhibits it because of bubbles emergence. First, we constructed an artificial market that allows short-selling and an artificial market with short-selling regulation and have observed the stock prices in both of these markets. We found that the market in which short-selling was allowed was more stable than the market with short-selling regulation, and bubbles emerged in the regulated market. Next, we evaluated the values of assets of agents who used three trading strategies, specifically, these agents were fundamentalists, chartists, and noise traders. The fundamentalists had the best performance among the three types of agents. Finally, we compared the price variation in the market in which short-selling was regulated with that in which it was not regulated after markets satisfied a regulation condition. Thus, we confirmed that the former rebounded faster than the latter.

Short selling regulation after the financial crisis – First principles revisited

This article examines the recent regulatory developments with regard to short selling. Short selling regulation is an important factor in firm governance because it affects the way in which firms are subject to market discipline. We begin with a comprehensive compilation of emergency restrictions on short selling adopted in the current crisis. Because of the tendency of some regulators to retain certain restrictions permanently, it is important to understand the fundamental legal and economic arguments regarding short selling. These arguments have at their core the question of whether there exists a market failure. The available evidence on balance suggests that short selling restrictions hamper the price discovery process. Also, while regulations against market abuse are required, it is an ineffective detour to pursue the goal of fair markets through the regulation of short selling. Based on these arguments, the article evaluates the approaches taken by the U.S. and U.K. regulators, who play a leading part in the current movement towards more comprehensive short selling regulation. The U.S. SEC’s recently adopted rules do not seem to bring much added value and will presumably affect market efficiency in the negative. First principles suggest a somewhat more positive stance on the SEC’s proposal for a circuit breaker rule and the U.K. FSA’s proposed disclosure approach, though both are subject to caveats. We also highlight some central questions for future research

Principled Regulatory Action? The Case of Short Selling

Mid-September 2008 saw governments around the world initiating emergency regulatory action to ban short selling. Short selling is a practice that has existed for many years and is regarded as a valuable activity to aid price discovery by the market. If regulatory action by securities regulators is aimed at promoting an efficient and informed market, actions to ban or restrict short selling may prove to be out-of-step with the objectives and principles of securities regulation. This paper examines the initial regulatory responses with respect to short selling from the perspective of three jurisdictions namely UK, Australia and the USA. The paper demonstrates that the regulatory responses differed due to the different 'standing starts' from which each regulator began the race to respond to the volatility in securities markets. It also illustrates that the different standing starts reflect the different problems with short selling in the particular jurisdiction. Thirdly, it shows how delegated rule making powers were used by each regulator to make rules that included rules with criminal sanctions attached. Finally it highlights the potential difficulties that global initiatives seeking a common approach to short selling regulation face. Such potential difficulties arise to threshold issues such as the nature of the relationship between the seller and the securities that make a sale of that security a short sale. The paper offers a definition of short selling that takes into account the various ways in which the share/stock may be sourced for settlement. By examining the regulatory objectives of each of three regulators, the FSA, ASIC and the SEC, it examines how an outright ban on certain short-selling combined with a disclosure regime for other short-selling fits in with the policy and objectives of securities market regulation articulated by the International Organisation of Securities Regulators.

Nibbling at the Edges - Regulation of Short Selling: Stock Borrowing and Restoration of an Uptick Rule

Many knowledgeable observers ascribe recent share price volatility to short selling, which has increased 4 or more times the historical 4% short interest in most large cap stocks. Much of this short selling has been naked short selling in which, contrary to SEC and stock exchange rules, short sellers sell stock without having first borrowed it and frequently with no intention of ever borrowing it in the future. Through Regulation SHO, which took effect in 2006, and then further efforts in August-October, 2008, the SEC initiated and then ratcheted up its campaign against naked short selling. The crackdown on naked short selling has increased the imperative that a short must borrow stock before selling it. This article asks whether or not stock borrowing from an individual investor is an investment contract, and therefore a security, or should be regulated in some other way. The article also disagrees with 35 years' academic commentary, which asserted that the uptick rule was harmful an should be eliminated as contrary to marklet efficiency. That commentary was wrong because, uniformly, it equates informational efficiency with overall market efficiency when a truly efficient market will exhibit both price continuity, to which an uptick rule would contribute, as well as some level of informational efficiency, which short selling aids.

Short sale update: SEC extends emergency actions through extraordinary rulemaking; US short selling ban expires

Purpose – This paper aims to provide a detailed description of the four releases issued by the US Securities and Exchange Commission (the “SEC”) on October 14 and 15, 2008 in connection with the three SEC emergency orders that were adopted on September 17 and 18, 2008, relating to the regulation of short selling.