Nibbling at the Edges - Regulation of Short Selling: Stock Borrowing and Restoration of an Uptick Rule

39 Pages Posted: 19 Mar 2009 Last revised: 8 Apr 2009

See all articles by Douglas M. Branson

Douglas M. Branson

University of Pittsburgh - School of Law (Emeritus)

Date Written: March 18, 2009

Abstract

Many knowledgeable observers ascribe recent share price volatility to short selling, which has increased 4 or more times the historical 4% short interest in most large cap stocks. Much of this short selling has been naked short selling in which, contrary to SEC and stock exchange rules, short sellers sell stock without having first borrowed it and frequently with no intention of ever borrowing it in the future. Through Regulation SHO, which took effect in 2006, and then further efforts in August-October, 2008, the SEC initiated and then ratcheted up its campaign against naked short selling. The crackdown on naked short selling has increased the imperative that a short must borrow stock before selling it. This article asks whether or not stock borrowing from an individual investor is an investment contract, and therefore a security, or should be regulated in some other way. The article also disagrees with 35 years' academic commentary, which asserted that the uptick rule was harmful an should be eliminated as contrary to marklet efficiency. That commentary was wrong because, uniformly, it equates informational efficiency with overall market efficiency when a truly efficient market will exhibit both price continuity, to which an uptick rule would contribute, as well as some level of informational efficiency, which short selling aids.

Keywords: securities, securities regulation, short selling, uptick rule, stock borrowing, SEC, NYSE, Nasdaq

JEL Classification: A10, G38, K22, P10

Suggested Citation

Branson, Douglas, Nibbling at the Edges - Regulation of Short Selling: Stock Borrowing and Restoration of an Uptick Rule (March 18, 2009). U. of Pittsburgh Legal Studies Research Paper No. 2009-10, Available at SSRN: https://ssrn.com/abstract=1364475 or http://dx.doi.org/10.2139/ssrn.1364475

Douglas Branson (Contact Author)

University of Pittsburgh - School of Law (Emeritus) ( email )

3900 Forbes Ave.
Pittsburgh, PA 15260
United States
412-624-3437 (Phone)

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