Reconsidering the Short-Selling Ban

I'm on the record as saying September 2008's short-selling ban instituted in many markets, including the U.S., was unnecessary and largely ineffective. Further, it caused collateral damage among quant funds, long short funds and others who were not targeting bank stocks in particular.

With the preceding in mind we are beginning to see papers appear on the subject, more or less saying the same thing: Market quality decreased, spreads widened and volatility worsened in non-shortable names. Mind you, politicians got to crow about it, so maybe we're using the wrong dependent variable here.

Sources:

• The Impact of Short Sales Restrictions. Ian W. Marsh and Norman Niemer
• Shackling Short Sellers: The 2008 Shorting Ban. Charles Jones, Ekkehart Boehmer and Xiaoyan Zhang

Comments

[HBWOW:]

Are you talking about short selling or NAKED short selling? And what are your thoughts on tiered short selling or tiered naked short selling?
Are any rules of ethics or controls over forced volatity considered or is it every man for himself? We all know the rich manipulators are guiding the market to their own interest and gain. The small investors should have gotten out a year or two ago. RIP - RIP!

Jan 12 12:20 PM

[User 221374:]

Banning short selling seems a stupid reaction to a different problem.

Isn't the removal of the uptick rule and the non-enforcement of borrowing rules the main cause of the extreme price movements downward? (other than discovering the CFO is close with Madoff or similar) It would seem to me that a market maker has to immediately lower the bid an extreme amount to protect himself when swamped with short sales that aren't buffered by the uptick rule and borrowing rules are not enforced.

Jan 12 12:59 PM