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Are US regulators going to ban short selling again?

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By Neil Wilson, Chief Market Analyst, Finalto

Short-selling ban to come? If you are a regulator and want to signal you think the market is at fault for doing the job that you, the regulator, ought to have done, then it kind of makes sense (I guess?) to get in front the market by saying ‘you can’t do that anymore’, we will deal with it now…

Like I say, I think it makes sense, or you could just let the market do its job of hollowing out the sector and righting it again. It probably is less messy to find a regulatory solution but you have to find it and first you have to draw a red line.

So, a Reuters report says US officials are assessing whether “market manipulation” sparked the recent volatility in bank shares. At the same time the White House said it will monitor “short-selling pressures on healthy banks.”

We love a short selling ban

We love a short-selling ban. Bafin did it for Wirecard…and we know how that ended up. The market was doing the job the regulators ought to have done with Wirecard. The SEC in the US has been here before – banning short sales on US financial stocks in 2008, stating that “unbridled short selling is contributing to the recent sudden price declines in the securities of financial institutions unrelated to true price valuation.”


Research carried out on this ban, and a similar one in the UK, after the crisis showed they actually tended to reduce market liquidity and slow down price discovery, while failing to prevent declines based on economic fundamentals. A 2014 Cass Business School study paper looking at examples from 2008-09 and 2010-11 suggests a ban leads to more volatility, greater declines in stock prices and a higher likelihood of default. Bans suggest weakness and longs pull out anyway.

Are the short traders really the problem here?

Back to the regulators and what they are not doing – the shorts, if they are troublemakers as the regulators see them, are slim lining the banks and making them take action with their balance sheets. What started as deposit flight leading to stock volatility and liquidity crunches has led to the market running against banks that are not really suffering deposit flight – the likes of PacWest and Western Alliance note they have not experienced “unusual deposit flows following the sale of First Republic”.

But the regulators are again part of the problem – they have taken an ad-hoc, make-it-up approach to each bank failure – SVB bailout, Signature executed, FRC gets JPM ‘rescue’…so traders inevitably continue to wonder who is next until a line in the sand is drawn.

The thinking is that the regulators ban short-selling to buy time to come up with some kind of plan to rebuild the industry. There may need to be a ‘whatever it takes’ line in the sand moment – clearly the US authorities haven’t done that – it may be that a ban on shorting bank shares forms part of that. Remember this bank stress is just on being the wrong side of rates, we’ve not even had a recession or full credit cycle.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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