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The aim of this paper is to provide a review of the literature on short selling. In particular, it seeks to describe the history of short selling and anti-shorting laws. With respect to short-selling regulation, the main emphasis will be placed on the UK FSA’s regulatory action.

This paper reviews the history of short selling and the development of anti-shorting laws, particularly with regard to the UK market. It also analyses the distinct literature on short selling.

The paper argues that the development of anti-shorting laws shows that regulators are instituting a policy unfavourable to short sellers. The opposers of short selling may be seen as lacking ideas and having the tendency to ban anything they do not like. Short sellers, on the other hand, may be seen as the elite bodyguards of the financial market whose job is to get rid of overvalued stocks, and ultimately keep the market safe and efficient. For this reason, short sellers deserve our praise and thanks, not our hatred and opprobrium.

To the authors’ knowledge, this paper is the first to review the history of short selling and the development of anti-shorting laws, particularly with regard to the UK market.

The world has just witnessed two of the greatest experiments in social reform ever attempted in history, viz., trying to make Russia free by Revolution, and trying to make America sober by Prohibition; and it is doubtful which of the two is the greater failure! But the strangest part of it all is that while native evidence is coming over by every mail (some of it the tardy admission of the prophets themselves who had hoped to save the world by their reforms), we see in England, from time to time, cranks and fanatics without experience at all who would wish us to “ follow in failure's footsteps.” It would be a pity to miss the lessons of the paradox, chief among which, surely, is the fact that here in England we are always accomplishing more under the principles of toleration than other countries by persecution. Freedom is part of the genius of our constitution, part of the instinct born of long legislative experience, which the younger and more impulsive countries can hardly hope to acquire at once. The New World may dearly love to teach its grandmother to suck the eggs of sobriety, but the New World will have to clean up the awful mess of this first experiment before old Granny Europe can be won over to the new idea. Human nature is much the same in the mass as it is in the individual; the Puritans produced the debaucheries of the Restoration, but it has been reserved for America to show that “ Prohibition is the mother of drunkenness,” though the older nations who have faced the problem for thousands of years could have told her that you can no more make men sober than you can make them happy by Act of Parliament, simply because liberty forms part of the essential psychology of human nature; and it is here that America has done the cause of Temperance more harm than any publican could ever have done had he set out to do harm of set purpose. But the United States has done more than endanger the cause of Temperance, for by bringing the machinery of government into disrepute, and officers of the law into temptation, she has undermined the prestige of civil morality all along the line, just like some stupid parent will wreck his whole authority by some petty act of bigotry. As a matter of fact—strange as it may seem—it is the modern publican himself who is the greatest Temperance reformer to‐day in England, and this for the simple reason that intemperance does not pay, but bootlegging, apparently, does; and, to judge from the latest details, more seems to be made out of alcohol by Prohibition than ever was made by the saloons. The figure was truly appalling when one comes to compare Temperance England with Prohibition America, which spends twice as much upon liquor as we do—some 720 million pounds, for example, are spent on bootlegging in U.S.A., as compared with 315 million pounds on honest drinking here, two‐thirds of which sum, in our case, of course, goes back to revenue, whereas double that sum in U.S.A. goes towards demoralising their Government. Town for town, the statistics all bear the same witness. London, with a population of seven millions in 1925, saw some 30,000 arrests for drunkenness; Chicago, with two millions, over 90,000; Philadelphia, with nearly the same population, had over 58,000 arrests, whereas Liverpool, with about half Philadelphia's population, had exactly one‐tenth of its number, viz., about 5,000, and so the story of the figure goes on, proving, as I say, that there is far more drunkenness under Prohibition than under sane regulation, and similar statistics as to crime are available. No one, of course, would have dared to maintain that this would be the result before the experiment had been made, but the experiment once made, we can only judge by the facts, with the result that all sound temperance reformers may well look with dismay upon the efforts of those who would wreck Temperance by making it into a Prohibition movement, with the effects in England it has had in America. It would be too high a price to pay for the little amount of drunkenness that remains to‐day of that wave of vice which once made it possible to get drunk for a penny and dead drunk for two‐pence. Indeed, in the last ten years the amount of drunkenness punished by imprisonment has diminished by more than 75 per cent., i.e., in 1913–14 the number was 51,851, and in 1923–24 this number had sunk to 11,425. Yet, small as this number is, foreigners coming over from the wine‐drinking countries are often shocked at the amount of intoxication they see over here as compared with their own countries, just as English visitors to New York come back scandalised.

The purpose of this paper is to investigate the effects of the 2008 SEC short‐sell moratorium on regional bank risk and return. The paper also examines the decline in “failures to deliver” securities in the wake of SEC short‐sell moratorium.

In total, six regional bank portfolios are derived and the beta coefficients from a CAPM model are estimated using the integrated generalized autoregressive conditional heteroskedasticity (IGARCH) method accounting for the short‐sell moratorium. Data on 110 regional banks in six US regions from January 2002 to December 30, 2011 are used to estimate the model.

The ban on naked short selling and the SEC short‐sell moratorium significantly increased individual bank risk for a majority of banks in six geographic regions, but also increased return in three of three regions. There was also reduced naked short selling as failures to deliver securities declined sharply after the September 2008 moratorium took effect.

Regional banks have generally not achieved the size needed to be deemed “too big to fail” by policy‐makers. Thus, policy changes such as the SEC short‐sell moratorium might be expected to have larger effects on regional banks than on larger banks, which might be shielded from the policy change by having achieved “too big to fail” status. The authors' results are consistent with research that has shown that short‐sell restrictions increase risk by reducing liquidity and trading volume.

The paper aims to investigate the effectiveness of the ban on short trading of stocks on the London Stock Exchange, introduced in September 2008 in the immediate aftermath of the collapse of Lehman Brothers. In particular, the paper investigates how far the ban succeeded in achieving the objectives set out by the regulator, the Financial Services Authority (FSA).

The approach involves comparing the returns on a portfolio of stocks covered by the short-sales ban with a portfolio of financial stocks exempt from the ban as a control group.

The paper presents evidence to show the effects to the ban to have been mostly confined to a large first-day return. Beyond that, there is some evidence that volatility was diverted from stocks covered by the ban to those for which short-sales were still permitted. Investors seem to have been wary of buying banned stocks when good news arrived, presumably out of fear that they may be overpriced.

All event studies are subject to the curse of the counterfactual: what would have happened if the event had not occurred? The problem is especially acute here, however, because the background was the most turbulent in modern economic and financial history.

The paper shows the limited value of short-sales bans over anything beyond the very short-term.

This paper helps to inform regulatory decision-making in financial crises.