Short Selling: A known unknown

Short selling is a technique that allows profiting from falling stock prices. In the autumn of 2008 several countries implemented a partial or complete ban on short selling. In this new commentary, Piero Cinquegrana, Associate Research Fellow at ECMI, reviews those decisions and attempts to answer three questions:

1) Is short selling legitimate?

2) What is the difference between covered and naked short selling?

3) Is short selling consistently defined across jurisdictions?

The author argues that short selling should be given more thought before definite decisions are taken and that restricting short selling is costly because of the difficulty in definining precisely the banned transactions and the complexity in enforcing such rules. The author concludes asking whether restrictions on short selling would survive a rigorous cost/benefit analysis.