A New Framework for the Global Regulation of Short Sales: Why Prohibition is Inefficient and Disclosure Insufficient

Short selling has long been regarded as aggressive speculation that destabilizes financial markets, raising concerns about their moral foundations. This view gathered unstoppable force in September 2008 when short sales were seen as the principal cause of precipitous falls in the market price of financial sector stocks. As a result, most developed market regulators declared a ban on short sales in financial sector stocks. This article argues that the best way to regulate short sales is through a dual strategy of disclosure and short trading halts, rather than a prohibition or an uptick rule. The short trading halts should be based on a sophisticated circuit breaker system that is focused on market conditions and preserves the proper function of the price formation mechanism. Disclosure and short trading halts should be complemented by a strict settlement regime, as recommended by the International Organization of Securities Commissions.