A Comparative Analysis of Short Selling Restrictions

39 Pages Posted: 16 Sep 2011 Last revised: 24 Aug 2012

See all articles by Chinmay Jain

Chinmay Jain

University of Ontario Institute of Technology

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics

Date Written: September 16, 2011

Abstract

Like many countries, the U.S. is concerned that short selling might destabilize markets. Currently, U.S. SEC Rule 201 restricts short selling for stocks that decline 10 percent from the previous day’s closing price. Historically, the U.S. has implemented both an uptick rule and a downtick rule to restrict short selling. Using a simulation approach, we examine the efficacy of these short selling restrictions and other alternative rules in reducing the incidence of short selling during serious market declines and leaving short selling unhindered otherwise. For each rule, we consider 5 different trigger conditions. We find that the execution rate for simulated short selling orders varies by regulatory regime and also depends on bull or bear markets condition. We conclude that a rule that takes into account a stock’s previous day’s closing price and applies to stocks with a high level of short interest is the most effective in balancing the price efficiency benefits of short selling with its panic ameliorating benefits.

Keywords: Short selling, tick restrictions

JEL Classification: G10

Suggested Citation

Jain, Chinmay and Jain, Pankaj K. and McInish, Thomas H., A Comparative Analysis of Short Selling Restrictions (September 16, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1928730 or http://dx.doi.org/10.2139/ssrn.1928730

Chinmay Jain (Contact Author)

University of Ontario Institute of Technology ( email )

2000 Simcoe Street North
Oshawa, Ontario L1H 7K4
Canada

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Thomas H. McInish

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-4662 (Phone)
901-678-3006 (Fax)

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