Short Selling Regulation after the Financial Crisis – First Principles Revisited

Seraina Gruenewald, Alexander Wagner and Rolf H. Weber
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Seraina Gruenewald: University of Zurich
Rolf H. Weber: University of Zurich

No 09-28, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: 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.

Keywords: Short selling; regulation; market abuse; market efficiency; financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2009-07, Revised 2009-10
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0928

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