Some things never change…

Posted by on Sep 9, 2011 in ArbMaker News! | No Comments

We recently turned up this news item from…1894!

It would interesting to know the precise objections the Governors of the NYSE had. Competition? Stealing a source of their trading income? Pressure from companies whose stock got shorted?

In recent times the objections to shorting have been politically motivated  – partly to find someone to blame for market dislocations and partly to be seen to be doing something.

Yet modern research into shorting shows it to be on balance Good – and banning it almost certainly Bad. Consider these conclusions from the research papers linked to below:

  • short sellers are important contributors to efficient stock prices
  • short interest contains valuable information for the market that makes prices more efficient
  • short sellers change their trading around extreme return events in a way that aids price discovery

In contrast:

  • stocks subject to the US short-selling ban in 2008 suffered a severe degradation in market quality as measured by spreads and price impacts (ie liquidity) and intraday volatility
  • the impact of the 2008 bans on leading market and financial indices in the US, France, the UK and Germany led to a systematic increase in the volatility of market indices and had an even stronger impact on financial indices
  • none of the studies found indications that short-selling bans reduced downward price pressure in a significant manner

Sadly, not useful information for regulators seeking to stay in the job or public officials chasing re-election.

Which shorts are informed? Ekkehart Boehmer, Charles Jones and Xiaoyan Zhang. Journal of Finance 63, 2008, 491-528. (Lead Article and Finalist, 2008 Smith Breeden Prize. BSI Gamma Foundation Grant.)

The good news in short interest. Ekkehart Boehmer, Brad Jordan and Zsuzsa Huszar. Journal of Financial Economics 96, 2010, 80-97. (Fama/DFA Prize for the best paper in the Journal of Financial Economics.)

Short selling and the price discovery process. Ekkehart Boehmer and Julie Wu. EDHEC-Risk Institute Working Paper, May 2010.

Spillover Effects of Counter-Cyclical Market Regulation: Evidence from the 2008 Ban on Short Sales. Abraham Lioui. The Journal of Alternative Investments 13, 2011, 53-66.

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