Short selling bans and restrictions : the regulators' response to the financial crisis

Abstract

Short selling is an investment technique which permits market participants to make a profit from over-priced securities and or from any drop in share prices. This technique requires the short seller to borrow securities from institutions at a price and subsequently sell them to the market at a higher price, thus making a profit. For centuries, this practice has elicited controversy, especially during times of market distress. The regulators' view and approach to the practice during times of crisis has always been negative. The short seller is the historic scape-goat when financial crisis hit and new measures are taken to silence market participants who see short sellers making a profit when the majority of market participants succumb to a collapsing market. In Chapter 1, a description of the very practice of short selling and of the market participants who generally engage in short seller will be given. Chapter 2 outlines the studies carried out by various authors about the practice of short selling, the beneficial aspect of short selling and also the possible detrimental effects. Chapter 2 sets to provide the necessary information in order to acknowledge the nature and complexity of short selling and its effects. Chapter 3 provides a brief overview of the regulation of short selling throughout history, together with a synopsis of what led to the 2007-2008 financial crisis and European Sovereign Debt crisis. This will then lead us to Chapter 4 which provides detail as to the regulatory approaches taken in respect of short selling, in addition to an analysis of the effectiveness of the measures. Chapter 5 deals specifically with the recently enacted EC Regulation on short selling and certain aspects of credit default swaps, discussing and analysing the salient featu