Mendoza School of Business

Questioning The Benefit Of Curbing Short Sales

Published: December 15, 2011 / Author: Floyd Norris

The following is an excerpt from an article in the New York Times that mentions the research by Finance Professors Robert Battalio and Paul Schultz which suggest that the decline in stock prices was not significantly driven or amplified by short selling. To read the entire article visit: Questioning The Benefit Of Curbing Short Sales

Back in what now seem to be the long-ago days of 2003 through 2007, when the economy seemed to be healthy and stocks were expected to rise as a matter of course, so-called naked short-selling was a subject of great interest to more than a few companies and politicians. The Securities and Exchange Commission responded with a new rule that was supposed to curb the practice.

This week the S.E.C. settled a case against a former options market maker for violating those rules in 2006 and 2007. The trader, Gary S. Bell, will pay $2.1 million to settle the allegations. Most of that is in the form of disgorging illegal profits, which shows, if nothing else, that finding a way around the rule was profitable.

To economists, restrictions on short-selling often seem to be foolish and costly impediments to efficient markets. To companies, and their executives, any short-selling — whether legal or not — can seem pernicious. That is particularly true when market stresses are at their greatest. It can become an article of faith that short-sellers are spreading false rumors aimed at destroying a company.


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