Short (finance)

In finance, short selling (also known as shorting or going short) is the practice of selling assets that have not been purchased beforehand, but which the seller may have borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller. "Shorting" and "going short" also refer to entering into any derivative or other contract under which the investor similarly profits from a fall in the value of an asset. Mathematically, short selling is equivalent to buying a negative amount of the assets. Short selling is almost always conducted with assets traded in public securities, commodities or currency markets, as on such markets the amount being made or lost can be monitored in real time and it is generally possible to buy back the borrowed assets whenever required. Going short can be contrasted with the more conventional practice of "going long", whereby an investor profits from any increase in the price of the asset.

History

The oldest case ever known of short-selling dates back to 1609, the year when Isaac Le Maire, one of the key shareholders of the Dutch East India Company, sold more shares of the company than he detained, for a delivery deferred by one or two years, betting that the share price would fall with the rise of a French competitor. As that assumption did not materialize, the company’s share price rose back and Le Maire was unable to buy back the shares to deliver them. Local authorities decided to ban shorting after that case.

In 1838, a broker in New York, Jacob Little, decided to sell short shares of the Erie company, which he reckoned was overpriced. The shares delivery was planned for 6 to 12 months later. Some of his enemies, knowing he would sooner or later need to obtain such securities, rushed to buy them en masse on the market, to have their price rise in an attempt of short squeeze. They however ignored that Little held convertible bonds issued by Erie. Little only had to request conversion of his bonds to meet his deliveries, turning their own weapons against them. The local authorities decided thereafter to limit to 60 days the delivery time of a short sale.

Short-selling followed by another failed corner, associated to poor assessment of the number of shares outstanding, was also one of the causes of the Panic of 1907. In 1931, after the gold standard was abandoned by Great-Britain, British, then US, authorities decided a temporary ban of short-selling.

In 1938, the Securities and Exchange Commission (SEC) adopted the uptick rule, allowing short-selling only at a price higher or equal to the previous quote; this provision has been enforced until 2007.

In 1949, Alfred Winslow Jones launched the first ever hedge fund, of a long/short type, that is, binding the purchase of a security and the short-sale of another, pre-borrowed, security.

On september 16th 1992, George Soros got famous for short-selling some $10 billion worth of pound sterling, correctly anticipating an imminent devaluation of the currency by the then John Major’s UK cabinet.

In 2004, observing a persistently high level of settlement fails, the SEC adopted the so-called Regulation SHO, requiring financial intermediaries to borrow shares before selling them unless having « reasonable certainty » to be able to do so within the next three days, and to close out without delay the settlement fails older than 10 days.

The financial crisis of 2008 induced many stock exchange watchdogs, often under pressure from their own government, to temporarily compel the intermediaries of investors shorting financial stocks to borrow shares beforehand, and to publish short positions higher than a given threshold, mostly 0.25% of issued equity.

It was also in 2008 when a spectacular corner happened on the Volkswagen stock: while Porsche already held 42.6 % of the shares and the state of Lower-Saxony 20 %, hedge funds anticipating a fall of the Volkswagen stock had borrowed huge quantities of shares to sell them short; they ignored that Porsche had bought calls (options to purchase) representing another 31.5 % ot he company’s equity capital, to several banks which had themselves bought spot the underlying shares to allow for a situation in which these options could be exercised. When these hedge funds had to reimburse their borrowings and look for shares on a market that had dried up, the stock price of Volkswagen suddenly rocketed and hedge funds incurred a loss of €20 to 30 billion.

The 2010 Greek economic crisis induced new measures to restrict shorting practices, while temporary bans decided in 2008 had been rolled over several times. More specifically, Germany unilaterally decided to prohibit naked short-selling of sovereign bonds of the euro zone.

Definitions

Selling short and selling forward

Selling a crop months before the harvest, or selling in advance the cargo of a vessel awaited in several weeks, are techniques which date back to antiquity. Technically, these sales are short, or “uncovered”: the object to the sale does not exist yet. They are also forward sales.

However, any forward sale is not necessarily short. If the bank’s delayed settlement service, such as the French SRD, allows the retail customer to settle with a delay, the bank makes sure, most often, that the underlying securities are already recorded on the customer’s account.

Financial markets apply the term of « forward » sales to derivative products, “futures” and options, but that of “short” or “uncovered” sales when negotiation takes place on a stock exchange. However the terms « shorting » and « going short », as opposed to « going long », apply to both futures markets and stock exchanges.

Indeed, futures markets imposed themselves notably because the opportunity of anticipating the fall of an asset’s price is equal to that of anticipating its rise, while on stock markets, short-selling is a more delicate and regulated practice.

naked short-selling and the locate

The wording of « naked short-selling » is inspired, under the guise of a pleonasm, from the US securities regulation, but has no single meaning: some understand from it the fact to sell stocks without having prior property, either through purchases or borrowings, others refer to it to note a settlement fail. Under a median definition, shorting would be “naked” when the shares are not held on the securities account, eg through a borrowing, and the seller would not have managed to borrow them for delivery to his account prior to the settlement of the sale, and nor would the seller have any guarantee, through a framework agreement with a broker, to have them available on request.

In the United States, the so-called locate rule, enforced since 2007, states the conditions to meet for a short sale to be licit, that is, not « naked »; either a link may be established with a hedging trade, even if the shares are not yet booked on the account, or the stock must be included in the list of easy to borrow stocks, published daily by a broker. However, this provision remains based on the registrants’ good faith and the SEC has no means to make sure they do abide by the rule.

The European commission is considering the adoption of a similar rule in a directive on markets in financial instruments to be released in 2012.

Operating mode

From trading to settlement

The technique is generally not accessible to retail or corporate customers because most banks check that shares are booked on the account prior to allowing their sale. However, NYSE Euronext proposes a delayed settlement service (SRD) which allows the investor to settle at month end his sales of stocks eligible to the service by virtue of their liquidity. In that case, it is the seller’s intermediary who borrows the securities to deliver them to the buyer and reimburses them at month end. A sale on the SRD therefore amounts to short-selling. When a stock exchanges executes, on day One, a sale order, the execution notice is transmitted to the clearing house, which translates it, in turn, into a settlement instruction; the central securities depository (CSD) controls there is no shortage of securities on day Four, since most depositories settle trades with a standard delay of 3 working days. For a sale to be settled, it is enough for shares to be available 3 days later. If a bank buys securities in T0, sells them in T1, receives them in T3 and delivers them in T4, it is technically short between T1 and T3. Short-selling is mostly practiced on over the counter markets, that is, outside the stock exchange. Two financial institutions can agree, one to buy, the other to sell, a given security for a given future settlement date, which may be later than the standard settlement delay applicable by a stock exchange. Shunning the exchange, the parties can wait until the eve of the unwinding date to carry their instructions, one for reception, the other for delivery, towards the central securities depository.

Covering a short sale

Several types of transactions can be carried out to cover a short sale:

• a securities borrowing;
• an outright securities purchase;
• a reverse repo, or temporary purchase;
• the exercise of a call option.

The securities borrowing is the most appropriate hedge, other techniques having an incidence on treasury. The borrowing allows to have securities delivered against the promise to return same-nature securities at a future date, generally in several days or weeks, and against a fee.

Short-selling is also used by the placing agent of an initial public offering (IPO) or of a new tranche of an Obligation assimilable du Trésor, or by the institution in charge of converting a convertible bond into equities. It is covered by the issue at a future date of the new securities. The short-seller may be tempted not to cover; he can bet he will be able to buy in on time the stock at a cheaper price without bearing the cost of a borrowing; national regulations tolerate this practice more or less.

Monitoring settlement fails

Selling short without arranging a hedge thereafter causes the settlement to fail; securities are not delivered, cash is not credited. The ‘fails-to-deliver’ (FTD), or simply ‘fails’, are most often fortuitous, incurred by a malfunction in the information system. Every central securities depository has its own rules on fails: some let a timeframe to participants, so that they can rectify their situation, others offer a borrowing service, which can be costly, or compel the defaulting seller to buy in the securities on the market whatever the price. Avoiding settlement fails is difficult: if the central depository conditions the unwinding of a sale to the presence of the shares on the seller’s book (as well as of the cash on the buyer’s), at settlement date, it has no knowledge of the sale at the very moment it is negotiated. At best it can find out, at the date it receives the instruction, by analyzing the SWIFT message, the date at which the seller declares he struck it. The CSD knows neither whether a fail is caused by a sale which was struck before or after the negotiation of a borrowing, nor whether that borrowing, if any, was effectively dedicated to that sale or not, nor whether such a sale constituted a market abuse under law; however this is not always understood, notably by those occasionally criticizing the DTCC (the US central depository), or the SEC, for not doing what it takes to prevent fails to occur. ·

Investment strategies

Many hedge funds propose different kinds of investment strategies which have in common to specifically depend on the use of short-selling.

Arbitrage

• arbitrage between a convertible and a stock: the fund buys a convertible bond whose implict call option of the underlying stock looks undervalued, and sells the stock short to make an arbitraging profit;
• equity market-neutral arbitrage: a bet on the compared evolution of two companies of the same industry, or a of given company benchmarked against its industry, can give rise to a strategy linking the purchase of an equity or of an equity and the short-sale of another equity;
• merger arbitrage: with the prospect of an IPO of a company on another, a typical arbitrage is to buy the target stock and sell short the stock of the potential buyer, to make a profit when the IPO is completed;
• negative opinion: the fund manager sells short the stock of a company which he reckons is overvalued or which he believes can suffer from a large and damaging event (loss of a major customer, class-action suit, regulatory reform, etc.) likely to make its price fall.

In general, these long/short equity strategies amount to take long positions on stocks for which the investor is bullish and short positions on stocks where is bearish. Finally, short-selling can be motivated by tax reasons; in the US, for instance, an investor keen to speculate on a fall of a stock he has got in his portfolio can qualify a sale as short on the triple condition not to hedge that long position, to close out his short position within the last 30 days of the year, and to keep his long position for at least another 60 days beyond the close-out. The seller is then taxed on the profit made, not from the difference between the sale and the average cost of his long position, but from the buy-in of his short position.

Hedging

Further information: Hedge (finance)

Hedging often represents a means of minimizing the risk from a more complex set of transactions. Examples of this are:

• A farmer who has just planted his wheat wants to lock in the price at which he can sell after the harvest. He would take a short position in wheat futures.
• A market maker in corporate bonds is constantly trading bonds when clients want to buy or sell. This can create substantial bond positions. The largest risk is that interest rates overall move. The trader can hedge this risk by selling government bonds short against his long positions in corporate bonds. In this way, the risk that remains is credit risk of the corporate bonds.
• an options trader may short shares in order to remain delta neutral so that he is not exposed to risk from price movements in the stocks that underlie his options.

Costs and benefits to the market

Benefits

• By enlarging negotiation of a stock to sellers who do not hold it, short-selling improves that stock’s liquidity, which in turn eases hedging. It is an essential part of the price discovery mechanism and is one of the market maker’s instruments.

• Short-selling is a useful counterweight to the widespread bullishness on stockmarkets; it dampens the formation of stock market bubbles. The price of Chinese stocks, quoted on both the Shanghai and Hong Kong stock exchanges, tends to be higher in Shanghai, where shorting is prohibited, than in Hong Kong, where it is allowed.

• It allows to inform the market of a possible fraud or accounting manipulation, when the information is not known from the moment investors, nor even detected by the financial watchdog. An American hedge fund manager, David Einhorn, has, for example, sold short the Lehman Brothers stock once he was convinced that provisions for impairment of the CDO portfolio disclosed by that bulge bracket broker in july 2008 were largely insufficient. But drawing attention on accounting irregularities can also lead the regulator to freeze the stock quotation of the respondent corporation, and thereby jeopardize the interests of the very ones who warned the market, as American speculators learned to their cost, after having sold short Chinese stocks on the NYSE during the 2011 summer.

Costs

• If outright purchase is conceptually symmetrical to short-selling, the average of price falls is higher than the average of price rises. It takes less time for panic to spread than for an asset bubble to swell. Short-selling therefore carries an aggravation risk of a financial crisis.
• A heavy price fall of a financial stock can trigger panic, not only among professionals, but also among small account holders, and can develop into a bank run, according to Callum McCarthy, chairman of the Financial Services Authority.
• Short-selling can be the tool of market abuse: a seller who would not have the intention to do what it takes to have securities delivered on his account by the settlement date of his short sale, and therefore would deliberately cause a fail, would not only harm the buyer, but also deceive the market, insofar as the price negotiated for the sale has been broadcast to the market and may have enticed other participants into selling the stock. More serious still is the so-called short and distort practice which is to sell a stock short and then influence the market downward by spreading negative rumors, launching a lawsuit, or requesting the regulator to make an audit of a targeted company; such an initiative, whether the root causes invoked are grounded or not, can be enough to draw downward the price of a stock, at least temporarily, and allow the short-seller to make a profit.

Key technical indicators

• The Days to Cover (DTC) describes the relationship between the total number of shares of a company that are being sold short and the number of trading days that are necessary to buy them in, given the level of liquidity of that stock. For example, if a total 10 million shares of company XYZ have been sold short while the average daily traded volume is 1 million, 10 days will be necessary to close out all short positions.

• The short interest is the share, as a percentage, for a given stock, of the number of shares sold short to the total number of issued shares. For example, if 10 million shares of short sales of company XYZ are outstanding, while 100 million shares have been issued, the short interest is 10 %. The average long term ratio is 4.5 % on both US and UK equities. During the market downturn of the 2008 summer, this ratio had been staying in that order of magnitude for the three UK financial stocks whose price had fallen furthest: 2.8 % of the equity capital of HBOS, 1.4 % of Royal Bank of Scotland and 5 % of Barclays. US regulation obliges NYSE and NASDAQ (but not multilateral trading facilities) to aggregate short positions declared by instructing participants (the sale order must stipulate “sell” or “short sell”) and to publish them daily.

• The long/short ratio, published by the research firm Data Explorers, is the part of the outstanding lent to the total outstanding issued, and is used as a proxy of short-selling activity, which is generally funded by securities finance.

Those indicators are however exact only provided all short-sellers publicize their sales to the market or the watchdog.

Perceptions of short selling

Short-selling has a negative image almost everywhere.^{[citation needed]} It is linked to speculation in the collective consciousness. It is banned by Islam. A Malaysian Minister of Finance has proposed to punish it with caning. In France, former Minister of Finance Michel Sapin compared it to gaming.^{[citation needed]}

At the height of the financial crisis in autumn 2008, after the financial watchdogs took a package of measures prohibiting or restricting short-selling, the Reuters agency recalled, by the title, « Short-sellers have been the villain for 400 years », that criticism levelled at them occur anew on each crisis: that was the case during the panic of 1907, referred to earlier, the 1929 Depression, of course, after Black Monday (1987) and the September 11 attacks.

Already under the First French Empire, Napoleon suspected short-sellers to undermine his policy. He passed a law that made them liable to imprisonment for one year. More recently, bosses of Tyco International, Enron, WorldCom, Bear Stearns or Lehman Brothers have alternately vilified the "manipulators" who spread false rumors after selling short the shares of their company, before it goes bust or is taken over by a competitor. But no investigation of the SEC has proved their case and no judicial court has ruled in their favor. In each case, it is recalled that the short seller sells shares he does not have, a turn most often legally inaccurate, but which casts suspicion on his motives. « He that sells what isn't his'n must buy it back or go to prison », said Daniel Drew, a Nineteenth Century US speculator. The press often describes the short seller as a "profiteer", a "scavenger", an "infringer"" or a « fraudster ».

John J. Mack, CEO of Morgan Stanley, pointed to short sellers, the day after a fall of nearly 25% of the share price of his company, and called upon the authorities to stop these "irresponsible" movements which have no "rational basis".

These perceptions are occasionally shared by politicians and regulators.

In the public debate that followed the demise of Bear Stearns, US senator Chris Dodd pointed to short sellers, saying « This goes beyond rumors. This is about collusion ».

Several months later, while the stock market was in turmoil, commenting restrictions ruled by the SEC, its chairman Christopher Cox spoke of « false rumors », of « unlawful manipulation through 'naked' short selling that threatens the stability of financial institutions » and of the "zero tolerance" of the Commission. The sharp fall in share prices of the financial sector would be attributable to market manipulation made possible by a regulatory loophole; borrowing securities "after" rather than "before", their short sale, definition of 'naked short-selling' used by the U.S. regulator, would be the cause, if one follows this reasoning, of the destabilization of the market. In september 2008, President George Bush stated, in a slip of the tongue, that short-sellers would be « persecuted », while he probably meant « prosecuted ».

The image of the short-seller is closely associated, in the public opinion, to that of a hedge fund, a predator, in particular since the 2000s, when some high-profile European companies were targeted by mostly US or UK-based hedge funds. In 2005, Franz Müntefering, number two of the first Merkel cabinet, had compared hedge funds to locusts, an expression that remained. So, when Porsche maneuvers around Volkswagen made them lose huge sums on their short sales, the media feel they tasted their own medicine, like British newspaper "The Telegraph", which ran the headline on a Germany that « got revenge on the locusts ».

Public action against short-selling since 2008

Bans

Most countries with a developed financial market have implemented short-selling bans since the summer of 2008. In july, the SEC banned the sole « naked » short-selling on 19 financial institutions, · then in september, any short sale, whether naked or not, on 799 financial institutions for a 3 week period. In the days that followed, most European countries followed suit. Australia decided the same restriction, but in including non-financial stocks. According to the Nomura Research Institute, it is Japan that applies the most stringent provisions.

If it was determined that short sales represented a significant share of trading volumes, and though the rise in outstanding fails, in the United States, was a real concern of the authorities in recent years, there was no evidence that short-selling, naked or not, had caused or exacerbated the financial crisis. These measures bore a sense of panic. The SEC chairman admitted in an interview that Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke were pressuring him, arguing that if they did not act in the moment, it would be fatal to financial institutions and that there would be nothing left to save. He added later on that, should the same crisis happen, he would not do it again.

With hindsight, however, these measures remained defensible under a precautionary principle. Depriving the market of short sales could have acted as a circuit breaker (although it was not the case). But this argument was barely advanced; it is easier to lay a blame on someone than to admit one's gropings to a worried public opinion.

Going against this trend, China considers, for its part, allowing short-selling along other financial techniques.

Disclosure requirements

At the same time they pronounced their temporary bans, stock exchange authorities of the United States, Great Britain, France, · of Spain, Belgium and the Netherlands, made it mandatory to report to the regulator or to disclose to the market any short position bigger than 0.25 % of the equity capital of listed financial companies.

The procedure is based on a disclosure obligation, not on a computer analysis of exchange-traded orders or instructions processed by the central depository, which would be very complicated and expensive to implement. The idea is anyway less to reveal the existence of market abuse than to discourage participants to commit any. Anyone disseminating negative information after publishing a short position would betray his intentions, and anyone abstaining from publishing would be liable to stiff penalties. Hedge funds fear however that such a device raises frivolous legal actions from business leaders disgruntled to realize they are shorted.

The idea of reporting volumes and prices of securities borrowing trades is also addressed. The regulator would be warned in this way of tensions on the securities finance market.

The European commission seeks to harmonize the rules adopted by its member states. A directive being prepared could retain the 0.2% threshold to entail mandatory notification to the market authority, and the 0.5% one to entail disclosure to the market. ·

The public debate on restrictions on short selling

The case for restrictions

A moral issue

Many people, in Europe and North America, believe that short selling should be, in principle, suppressed, or at least restricted. Robert Goebbels, Member of the European Parliament and member of the Commission of Economic Affairs, believes that naked short selling is "immoral" and "scandalous". Arnaud Montebourg, a French Socialist Party MP, sees « a symbol of the casino economy which must be defeated ». In Canada, Claude Chiasson, a columnist for Le Devoir, laments "a perverse process" by which the long-term investor acts against its interests by lending its securities to a borrower who will sell them, and denounces the right of a broker, in North America, to have its investor clients sign a clause permitting it to lend their securities at any time, therefore, somehow, without their knowledge.

The circuit-breaker

Proponents of restrictions see them as a way to thwart a speculation that could accelerate the fall of equity markets. Enacting an uptick rule or an outright ban helps to deter market abuses, instead of having to punish them after they have caused damage.

Restoring trust

This argument was raised early in the financial crisis. The SEC Chairman linked naked short selling and the risk of loss of confidence as soon as 15 july 2008. If the causal relationship between the level of fails and the price fall is not proven, temporary bans on short-selling did reassure investors. These emergency measures were the signal sent to the public opinion that the situation was under control. The Los Angeles Times, for example, was pleased to see the SEC « flex its muscles ».

Defending jobs and business

Banning short selling, not temporarily but permanently, is an argument in favor of protecting businesses and employees. In a survey conducted in october 2008, 60% of U.S. business leaders responded that short selling was harmful to the economy.

In France, the center-right MP Stéphane Demilly said that short selling was "inherently unhealthy"; "there is no question [it] has helped accelerate the global financial crisis [...] Listed companies and their employees suffer from it, with the collateral social damage that we know".

On the foreign exchange market, a restriction to sell a foreign currency short, by a central bank, like that of Brazil in 2011, helps to thwart a rise of the local currency, which harms the country’s exporters.

Defending the interests of small investors

Prohibiting short selling would be an indirect way to have an unregulated industry melt down, that of hedge funds, which heavily relies on this technique. Small investors, and shareholders of mutual funds, that are properly regulated, would no longer see their portfolio performance lessened by the unfair advantage enjoyed by hedge funds.

The case against restrictions

Dubious causality

The main argument of opponents is that restrictions are groundless: short sales are not the cause of the crisis, and restrictions are not the answer to the crisis. For Professor Asquith, there is no academic evidence that short sellers were able to drive a company into bankruptcy without other underlying reason. Instead, according to Professor Owen Lamont, companies attacked by short sellers appear in retrospect as overvalued; short sales are not a priori evidence of market abuse.

Moreover, according to a team of researchers at the University of Zurich, a chronological analysis of share prices and short positions in these shares suggest, not that falling prices are the "consequence" of short-selling but, rather, that they are its "cause". Another study suggests, however, that the short seller makes a better interpretation of publicly available information on a company.

That short sales be made without prior loan is not more damaging, they are responsible for only a small portion of outstanding fails, around 6%, for example, of the value of Canadian stocks according to a study. And the total shorted outstanding position, of about 1% of market capitalization, cannot cause an acceleration of falling prices.

Dubious effectiveness

Many market professionals believe that the bans are futile or unnecessary. The Nomura Research Institute notes that restrictions on short selling implemented in Japan since 2008 have not boosted share prices, and recalls that the taxation of futures contracts on the Nikkei 225, that had been decided in 1990 to that same effect, had not either.

In May 2010, the German government's decision to ban short sales of euro-denominated debt listed in Germany is especially criticized, because market-makers are exempt of it and that the Greek debt, then attacked, is actually listed elsewhere (the measure will be quietly withdrawn two months later). Even Jean-Pierre Jouyet, president of the AMF, "doubts the effectiveness of the prohibition of Berlin".

And a ban without exemptions can still be circumvented, either by selling short in a market where it does not apply, either by buying put options on a futures market, either by selling a futures contract stock index. The investor can circumvent a ban on financial stocks by selling an index futures and buying non-financial stocks making up this index. Finally, to supporters of a return, in the United States, or an introduction, in Europe, of the uptick rule, critics point out that decades of application of this device have not proved useful.

Selectivity and asymmetry

By taking an ironic distortion of the symbol of the SEC,"Selective Enforcement Commission", The Economist notes that bans are almost always on financial stocks, while there is no evidence that they are more prone to naked short selling than industrial stocks. But bank executives are more influential than those of the industry with the SEC and the Treasury and it is not even granted that the first ban, on 19 stocks, would have been enforced if two of them, Fannie Mae and Freddie Mac had not been subject to rumors of impending bankruptcy. Besides, the magazine asks, why should a bet on a price fall harm the economy more than one on a price increase with the risk of a speculative bubble? This asymmetry of treatment does not protect the investor, instead it is misleading, and the regulator is out of his role.

Side effects

Many professionals believe that decisions were not only unnecessary but also undesirable. Xavier Rolet, chairman of the LSE, reckons they are « counterproductive ». Some believe that it is the politicians and regulators who have communicated their anxiety to the market. The ban on the debt in euro decided by Germany in 2010, unilaterally, and to the surprise of the markets, had triggered an immediate fall of Wall Street. Professor Didier Marteau notes a paradoxical increase of volatility, and the difficulties encountered by some investors in their hedging. Hedge funds specializing in long / short strategies have had to forgo some purchases because they could not sell other assets short.

Indeed, the comparison of the price history, of financial stocks, with that of non-financial stocks, and comparisons, for the sole financial stocks, between their behaviour before or after ban periods, and their behaviour during ban periods, showed those measures had the effect, not to stem their price fall, but to raise their volatility. Even the mandatory disclosure of short positions may have another undesirable effect: excessive transparency may trigger herd behavior and ultimately also feed panic.

Practical difficulties of implementation

The measures decided so far depend on the diligence of all participants to comply with regulations and the fairness of the information they provide. Going further, toward an automated control of transactions, is costly and technically difficult. Checking that a short sale is covered by a borrowing implies an integration of trading systems with delivery-and-settlement systems; but that would be inconsistent, at least in Europe, with the principles of segregation of those two functions, and competition between their service providers, which are the very basis of the European directive on Markets in Financial Instruments, enforced since 2004. Checking that the price of a short sale is greater than or equal to the previous sale is certainly a proven mechanism, but the recent stock market fragmentation would make it more expensive to implement (how to compare a price negotiated in trading venue X with the previous one negotiated in trading venue Y?), except to leave breaches in which short sellers would step into. Another proposal, to reduce the settlement period from T +3 to T +1, represents alone a challenge, and it would not even apply to over-the-counter sales.

See also

• Anthony Elgindy
• Inverse exchange-traded fund
• Joseph Parnes
• Long (finance)
• James Chanos
• Magnetar Capital
• Manuel P. Asensio
• Repurchase agreement
• Seth Klarman
• Socially responsible investing
• Straddle
• Warren Buffett

External links

• Official site of Data Explorers, which publishes a securities finance activity indicator
• Short-selling: Strategies, Risks, and Rewards, Frank J.Fabozzi, John Wiley and Sons Inc, New Jersey, 2004
• Barron's on Off Wall Street Consulting Group, July 31, 2010
• "Short-Selling Bans Dampen 130/30 Strategies Worldwide," Global Investment Technology, Sept. 29, 2008
• Short Selling Introduction
• Short Interest: What it tells us
• SEC Discussion of Naked Short Selling
• '"Financial Interest Disclosures Can Protect Markets from 'Short & Distort' Manipulators", Alex J. Pollock, June 6, 2006, Washington Legal Foundation
• Coverage of controversial short-selling 'conspiracy' lawsuits by tobacco litigation specialists in US: Short Tempers, Risk Magazine (2006), Navroz Patel
• In pursuit of the naked short, Journal of Law and Business, New York University, Spring 2009
• (French) Rapport de l'AMF sur les ventes à découvert, 23 february 2009
• (French) Interdiction de prendre une position courte nette sur une liste de valeurs financières françaises (Foire aux questions), 14 september 2011, retrieved 13 february 2012

Bibliography

• Sloan, Robert. Don't Blame the Shorts: Why Short Sellers Are Always Blamed for Market Crashes and Why History Is Repeating Itself, (New York: McGraw-Hill Professional, 2009). ISBN 978-0-07-163686-5
• Wright, Robert E. Fubarnomics: A Lighthearted, Serious Look at America's Economic Ills, (Buffalo, N.Y.: Prometheus, 2010). ISBN 978-1-61614-191-2