Short selling and the development of anti-shorting laws in the UK

Author:Azhar Mohamad
Position:Department of Finance, Kulliyyah of Economics and Management Sciences, International Islamic University Malaysia, Kuala Lampur, Malaysia
Pages:9-23
SUMMARY

Purpose - The aim of this paper is to provide a review of the literature on short selling. In particular, it seeks to describe the history of short selling and anti-shorting laws. With respect to short-selling regulation, the main emphasis will be placed on the UK FSA’s regulatory action. Design/methodology/approach - This paper... (see full summary)

 
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Short selling and the
development of anti-shorting
laws in the UK
Azhar Mohamad
Department of Finance,
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Abstract
Purpose – The aim of this paper is to provide a review of the literature on short selling. In particular,
it seeks to describe the history of short selling and anti-shorting laws. With respect to short-selling
regulation, the main emphasis will be placed on the UK FSA’s regulatory action.
Design/methodology/approach This paper reviews the history of short selling and the
development of anti-shorting laws, particularly with regard to the UK market. It also analyses the
distinct literature on short selling.
Findings – The paper argues that the development of anti-shorting laws shows that regulators are
instituting a policy unfavourable to short sellers. The opposers of short selling may be seen as lacking
ideas and having the tendency to ban anything they do not like. Short sellers, on the other hand, may be
seen as the elite bodyguards of the nancial market whose job is to get rid of overvalued stocks, and
ultimately keep the market safe and efcient. For this reason, short sellers deserve our praise and
thanks, not our hatred and opprobrium.
Originality/value – To the authors’ knowledge, this paper is the rst to review the history of short
selling and the development of anti-shorting laws, particularly with regard to the UK market.
Keywords Regulation, History, Economy, Society, Anti-Shorting laws, Short selling
Paper type Literature review
1. Introduction
Short selling is perhaps one of the most controversial subjects discussed by market
participants and the regulators of nancial markets. Short selling is the sale of a security
that the seller does not own. Generally, there are two types of short selling: covered short
selling and naked short selling. The UK’s Financial Services Authority (FSA) denes
covered short selling as “a series of transactions where the short sellers normally borrow
the number of shares that are being sold short, so that they can be delivered to buyers at
settlement”. Naked short selling, on the other hand, is dened as “a series of transactions
where the short sellers sell shares they do not own, without having to set aside any
shares to settle the transaction” (FSA Discussion Paper, 2009 DP09/1: 6). Undeniably,
short selling is the best strategy for investors and speculators who are pessimistic and
have a bearish view about a company’s future performance, allowing them to place a bet
that the stock price is going to fall. In general, a short sale is costlier to execute than a
long sale; thus, academics regard this constraint as consistent with a limit-to-arbitrage
JEL classication – K20
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
Development
of
anti-shorting
laws in the UK
9
Journalof Financial Regulation
andCompliance
Vol.24 No. 1, 2016
pp.9-23
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-05-2014-0025

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