Short Selling Bans Play to the Dumb Money Crowd

By on November 18, 2009

Zubin Jelveh, writing for The New Republic, examines the notion that short selling bans accomplish what they are intended to do. The SEC implied stopping short sales would “protect the integrity and quality of the securities market and strengthen investor confidence.”

Two European economists, Alessandro Beber and Marco Pagano, looked at the effects of short-selling bans on over 5,000 stocks in 19 countries after Lehman’s collapse. Their conclusion:

-the knee-jerk reaction of most stock exchange regulators around the globe to the financial crisis – imposing bans or regulatory constraints on short-selling – has been detrimental for market liquidity and price discovery, and at best neutral in its effects on stock prices. The ban-induced decrease of market liquidity is especially serious because it came at a time when bid-ask spreads were already high as a result of the crisis and investors were desperately seeking liquid security markets due to the freeze of many fixed income markets.

Gary Weiss, in his book Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments, an excellent work on the many ways the securities industry fleeces customers, makes the case for short selling in exposing frauds and stock scams. Weiss vehemently defends the practice of naked short selling, in which investors haven’t borrowed the stocks they short.

Sources:

The New Republic

Amazon.com

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