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Short Selling Regulation after the Financial Crisis – First Principles Revisited

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Author Info

  • Seraina GRUENEWALD

    (University of Zurich)

  • Alexander F. WAGNER

    (Swiss Finance Institute and University of Zurich)

  • Rolf H. WEBER

    (University of Zurich)

Abstract

This article examines the recent regulatory developments with regard to short selling. 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 regulations 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 highlight some central questions for future research.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 09-28.

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Length: 56 pages
Date of creation:
Date of revision:
Handle: RePEc:chf:rpseri:rp0928

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: Short selling; regulation; market abuse; market efficiency;

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Cited by:
  1. Alessandro Beber & Marco Pagano, 2013. "Short-Selling Bans Around the World: Evidence from the 2007–09 Crisis," Journal of Finance, American Finance Association, vol. 68(1), pages 343-381, 02.
  2. Astrid Herinckx & Ariane Szafarz, 2012. "Which Short-Selling Regulation is the Least Damaging to Market Efficiency? Evidence from Europe," Working Papers CEB 12-002, ULB -- Universite Libre de Bruxelles.
  3. Çankaya, Serkan & Eken, Hasan/M. & Ulusoy, Veysel, 2011. "The Impact of Short Selling on Intraday Volatility: Evidence from the Istanbul Stock Exchange," MPRA Paper 43658, University Library of Munich, Germany.

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