Article: What To Know About Short-Seller Risks During Pandemic

Article - Academic

What To Know About Short-Seller Risks During Pandemic

Avi Weitzman, Barry Goldsmith and Jonathan Seibald

Law360, 3 June 2020

As the world struggles to cope with the COVID-19 pandemic, and volatile markets are rattled by the latest virus and economic news, publicly traded companies are increasingly susceptible to fraudulent short-seller attacks. While legitimate short selling plays an important and well-recognized role in the public markets, there are a few who have abused and misused short selling to manipulate the price of public company stock.

Read full article.

Academic: Joshua Mitts, Ph.D

Academic, Article - Academic

 Joshua Mitts, Ph.D is an Associate Professor of Law at Columbia Law School. Joshua Mitts, who joined the faculty in 2017, uses advanced data science for his research on corporate and securities law. His primary focus is on information disclosure in capital markets, consumer financial protection, and related topics in law and finance. Mitts employs empirical methods, including statistical analysis and machine learning, for his research on short-selling, informed trading on cybersecurity breaches, information leakage and hedge-fund activism, insider trading on corporate disclosure, and information transmission in financial markets.

Continue reading “Academic: Joshua Mitts, Ph.D”

Article: Fails-to-deliver, short selling, and market quality

Article - Academic

Fails-to-deliver, short selling, and market quality

Veljko Fotak, Vikas Raman, Pradeep K. Yadav

Journal of Financial Economics, 1 December 2014

We investigate the aggregate market quality impact of equity shares that fail to deliver (hereafter “FTDs”). For a sample of 1,492 NYSE stocks over a 42-month period from 2005 to 2008, greater FTDs lead to higher liquidity and pricing efficiency, and their impact is similar to our estimate of delivered short sales. Furthermore, during the operative period of a Security and Exchange Commission (SEC) order mandating stock borrowing prior to short sales, the securities affected display relatively lower liquidity and higher pricing errors. Finally, we do not find any evidence that FTDs caused price distortions or the failure of financial firms during the 2008 financial crisis.

Paywall access to article.

Article: Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe

Article - Academic

Which short-selling regulation is the least damaging to market efficiency? Evidence from Europe

Oscar Bernal, Astrid Herinckx, Ariane Szafarz

International Review of Law and Economics, 1 March 2014

Exploiting cross-sectional and time-series variations in European regulations during the July 2008–June 2009 period, we show that: (1) prohibition on covered short selling raises bid-ask spread and reduces trading volume, (2) prohibition on naked short selling raises both volatility and bid-ask spread, (3) disclosure requirements raise volatility and reduce trading volume, and (4) no regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.

Read full article.

Article: Naked Short Selling and the Market Impact of Fails-to-Deliver Evidence from the Trading of Real Estate Investment Trusts

Article - Academic

Naked Short Selling and the Market Impact of Fails-to-Deliver: Evidence from the Trading of Real Estate Investment Trusts

Erik Devos, Thomas McInish, Michael McKenzie, James Upson

The Journal of Real Estate Finance and Economics, 27 July 2013

Naked short selling and purposeful fails-to-deliver have been identified in the popular press and by the SEC as contributing factors to the stock market decline in 2008. We investigate the market impact of the announcement that fails-to-deliver have occurred for a sample of real estate investment trusts (REITs). We find little evidence that this announcement affects returns or has any market manipulation ability. We find that fails-to-deliver are most consistent with a 1 to 3 days delivery difference between the short sale and offsetting covering trades. These results hold independent of the type of REIT (equity or mortgage REITs). Overall, our findings suggest that naked short selling and purposeful fails-to-deliver may not have contributed much to REIT losses during the financial crisis.

Paywall access to article.

Article: Naked Short Selling and Market Returns

Article - Academic

Naked Short Selling and Market Returns

Thomas J. Boulton, Marcus V. Braga-Alves

The Journal of Portfolio Management, 30 April 2012

Boulton and Braga-Alves study persistent failures to deliver (fails) to better understand naked short sellers’ trading strategies, their ability to profit from their trades, and the market’s reaction to information about their activities. Contrary to recent claims that naked short sellers are momentum traders who drive down stock prices, they find that returns are typically positive just prior to periods of increased naked short selling that result in persistent fails and that returns generally remain positive for several weeks afterward.

Paywall access to article.

 

Article: The impact of naked short selling on the securities lending and equity market

Article - Academic

The impact of naked short selling on the securities lending and equity market

Steven Lecce, Andrew Lepone, Michael D. McKenzie, Reuben Segara

Journal of Financial Markets, 1 February 2012

This paper examines the impact of naked short selling on equity markets where it is restricted to securities on an approved list. Consistent with Miller’s (1977) intuition, stocks with the highest dispersion of opinions and short sale constraints are the only stocks to exhibit significant and negative abnormal returns in the post-event period. We also find slightly higher stock return volatility and a small reduction in liquidity when naked short sales are allowed. Overall, it impairs market quality (liquidity and volatility), although there appears to be some improvement in price efficiency in stocks with high short sale constraints.

Paywall access to article.

Article: How the Australian Ban on Short Selling During the GFC Affected Market Quality and Volatility

Article - Academic

How the Australian Ban on Short Selling During the GFC Affected Market Quality and Volatility

Thomas Henker, Julia Henker, Uwe Helmes

2012 Financial Markets & Corporate Governance Conference, 30 August 2011

We examine the effects of the short selling ban, imposed by Australian regulators in the wake of the global financial crisis, on trading of financial stocks. Unlike other developed markets, where regulators imposed short-selling restrictions for brief periods of time at the height of the financial crisis, the ban on short selling of financial stocks on the Australian Stock Exchange lasted eight months, including both the tumultuous end of 2008 and the calmer period up to May 2009.

PDF (55 pages): How the Australian Ban on Short Selling During the GFC Affected Market Quality and Volatility

Article:Short Selling in a Financial Crisis: The Regulation of Short Sales in the United Kingdom and the United States

Article - Academic

Short Selling in a Financial Crisis: The Regulation
of Short Sales in the United Kingdom and the
United States

Katherine McGavin

Northwestern Journal of International Law & Business, 15 December 2010

In a well-regulated market with minimal risk of abuse, the liquidity
and information efficiency benefits of short selling far outweigh its
potential harm. Contrary to the recent hostility short sellers face from
market regulators and the popular press,’ short sellers in aggregate are
neither market villains nor agents of destruction. While a small minority of
short sellers have exploited lax regulation and inattentive enforcement of
anti-abuse rules to manipulate stock prices and earn substantial fees, these
rare episodes suggest that the world’s major capital markets need better
enforcement of existing rules and not new rules per se. The failure of
market regulators to prevent abuse and manipulation of stock prices by short sellers and curb naked short selling reflects a failure of enforcement,
not bad underlying policy.

PDF  (41 pages): Short Selling in a Financial Crisis: The Regulation
of Short Sales in the United Kingdom and the
United States