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Short Selling Regulation after the Financial Crisis - First Principles Revisited


Seraina N. Gruenewald


University of Zurich - Rechtswissenschaftliches Institut (School of Law)

Alexander F. Wagner


University of Zurich - Department of Banking and Finance; Harvard University; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Rolf H. Weber


University of Zurich - Faculty of Law


International Journal of Disclosure and Regulation, Vol. 7, No. 2, pp. 108-135
Swiss Finance Institute Research Paper No. 09-28

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

Number of Pages in PDF File: 54

Keywords: Short Selling, Regulation, Market Abuse, Efficiency, Financial Crisis

JEL Classification: G01, G18, G38

Accepted Paper Series


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Date posted: July 27, 2009 ; Last revised: June 2, 2010

Suggested Citation

Gruenewald, Seraina N. and Wagner, Alexander F. and Weber, Rolf H., Short Selling Regulation after the Financial Crisis - First Principles Revisited. International Journal of Disclosure and Regulation, Vol. 7, No. 2, pp. 108-135 ; Swiss Finance Institute Research Paper No. 09-28. Available at SSRN: http://ssrn.com/abstract=1439652

Contact Information

Seraina Neva Gruenewald
University of Zurich - Rechtswissenschaftliches Institut (School of Law) ( email )
Raemistrasse 74/38
CH-8001 Zurich
Switzerland
Alexander F. Wagner (Contact Author)
University of Zurich - Department of Banking and Finance ( email )
Plattenstrasse 14
Zürich, 8032
Switzerland
+41 44 634 3963 (Phone)
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
HOME PAGE: http://www.alex-wagner.com

Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Rolf H. Weber
University of Zurich - Faculty of Law ( email )
Universität Zürich
Rämistrasse 74 / 57
Zürich, CH-8001
Switzerland
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