Regulating Short Selling in Europe After the Crisis

Rodolphe Baptiste Elineau, Harvard University

Abstract

Short selling contributes to the efficient functioning of capital markets. While bullish investors tend to hold long positions, bearish investors act on information by shorting stock, therefore fostering the incorporation of good and bad information into stock prices. However short sellers are ill viewed by corporate officers and directors and financial regulators. In the midst of the 2008 global financial crisis, several financial regulators in the European Union issued emergency orders to crack down on short sellers, which resulted in a fragmented approach to short selling and created a case for regulatory action at the European Union level. This article reviews the European Commission’s proposal on short selling and certain aspects of credit default swaps, adopted on September 15, 2010. While the need to shed light on this trading strategy further supports the need for regulatory action, there appears to be some cause for concern. This article evaluates the European Commission’s approach and finds reasons to believe that it is unduly tilting the playing field against short selling and undermining the efficiency of capital markets in the European Union.