Short (nance)

ative amount of the instrument. A short sale may be motivated by a variety of objectives. Speculators may sell
short in the hope of realizing a prot on an instrument
which appears to be overvalued, just as long investors
or speculators hope to prot from a rise in the price of
an instrument which appears undervalued. Traders or
fund managers may hedge a long position or a portfolio
through one or more short positions.

1 Concept
Schematic representation of short selling in two steps. The short
seller borrows shares and immediately sells them. The short seller
then expects the price to decrease, when the seller can prot by
purchasing the shares to return to the lender.

The following example describes the short sale of a security. In order to prot from a decrease in the price of a security, a short seller can borrow the security and sell it expecting that it will be cheaper to repurchase in the future.
When the seller decides that the time is right (or when the
lender recalls the securities), the seller buys equivalent securities and returns them to the lender. The process relies
on the fact that the securities (or the other assets being
sold short) are fungible; the term borrowing is therefore used in the sense of borrowing cash, where dierent
bank notes or coins can be returned to the lender (as opposed to borrowing a car, where the same car must be
returned).

In nance, short selling (also known as shorting or going short) is the practice of selling securities or other
nancial instruments that are not currently owned, and
subsequently repurchasing them (covering). In the
event of an interim price decline, the short seller will
prot, since the cost of (re)purchase will be less than the
proceeds which were received upon the initial (short) sale.
Conversely, the short position will be closed out at a loss
in the event that the price of a shorted instrument should
rise prior to repurchase. The potential loss on a short sale
is theoretically unlimited in the event of an unlimited rise
in the price of the instrument, however, in practice, the
short seller will be required to post margin or collateral
to cover losses, and any inability to do so on a timely basis would cause its broker or counterparty to liquidate the
position. In the securities markets, the seller generally
must borrow the securities in order to eect delivery in
the short sale. In some cases, the short seller must pay a
fee to borrow the securities and must additionally reimburse the lender for cash returns the lender would have
received had the securities not been loaned out.

A short seller typically borrows through a broker, who

is usually holding the securities for another investor who
owns the securities; the broker himself seldom purchases
the securities to lend to the short seller.[1] The lender does
not lose the right to sell the securities while they have been
lent, as the broker will usually hold a large pool of such
securities for a number of investors which, as such securities are fungible, can instead be transferred to any buyer.
In most market conditions there is a ready supply of securities to be borrowed, held by pension funds, mutual
funds and other investors.

Short selling is most commonly done with instruments

traded in public securities, futures or currency markets,
due to the liquidity and real-time price dissemination
characteristic of such markets and because the instruments dened within each class are fungible.

The act of buying back the securities that were sold short
is called covering the short or covering the position.
A short position can be covered at any time before the
securities are due to be returned. Once the position is
covered, the short seller will not be aected by any subsequent rises or falls in the price of the securities, as he
already holds the securities required to repay the lender.

In practical terms, going short can be considered the

opposite of the conventional practice of "going long",
whereby an investor prots from an increase in the price
of the asset. Mathematically, the return from a short position is equivalent to that of owning (being long) a neg-

Short selling refers broadly to any transaction used by

an investor to prot from the decline in price of a borrowed asset or nancial instrument. However some short
positions, for example those undertaken by means of
derivatives contracts, are not technically short sales be1

2 HISTORY

cause no underlying asset is actually delivered upon the

initiation of the position. Derivatives contracts include
futures, options, and swaps.[2][3]

3. Short seller is required to return the shares, and is

compelled to buy 100 shares of ACME Inc. for
$2,500.

1.1

4. Short seller returns the shares to the lender who accepts the return of the same number of shares as was
lent.

1.1.1

Worked examples
Protable trade

Shares in ACME Inc. currently trade at $10 per share.

1. A short seller investor borrows from a lender 100
shares of ACME Inc. and immediately sells them
for a total of $1,000.
2. Subsequently, the price of the shares falls to $8 per
share.

5. Short seller incurs as a loss the $1,500 dierence

between the price at which he sold the shares he borrowed and the higher price at which he had to purchase the shares he returned (plus borrowing fees).

2 History

Some hold that the practice was invented in 1609 by

3. Short seller now buys 100 shares of ACME Inc. for Dutch merchant Isaac Le Maire, a sizeable shareholder
of the Vereenigde Oostindische Compagnie (VOC).[4]
$800.
Edward Stringham has written extensively on the de4. Short seller returns the shares to the lender, who velopment of sophisticated contracts on the Amsterdam
must accept the return of the same number of shares Stock Exchange in the seventeenth century, including
as was lent despite the fact that the market value of short sale contracts.[5] Short selling can exert downward
the shares has decreased.
pressure on the underlying stock, driving down the price
of shares of that security. This, combined with the seem5. Short seller retains as prot the $200 dierence (mi- ingly complex and hard-to-follow tactics of the practice,
nus borrowing fees) between the price at which he has made short selling a historical target for criticism.[6]
sold the shares he borrowed and the lower price at At various times in history, governments have restricted
which he was able to purchase the shares he re- or banned short selling.
turned.
The London banking house of Neal, James, Fordyce and
Down collapsed in June 1772, precipitating a major crisis
1.1.2 Protable covered trade
which included the collapse of almost every private bank
in Scotland, and a liquidity crisis in the two major bankShares in ACME Inc. currently trade at $10 per share.
ing centres of the world, London and Amsterdam. The
bank had been speculating by shorting East India Com1. A short seller investor owns 100 shares of ACME pany stock on a massive scale, and apparently using customer deposits to cover losses. It was perceived as having
Inc. and sells them for a total of $1,000.
a magnifying eect in the violent downturn in the Dutch
2. Subsequently, the price of the shares falls to $8 per tulip market in the eighteenth century. In another wellshare.
referenced example, George Soros became notorious for
breaking the Bank of England" on Black Wednesday of
3. Short seller now buys 100 shares of ACME Inc.
1992, when he sold short more than $10 billion worth of
for $800, or alternatively, purchases 125 shares for
pounds sterling.
$1,000.
The term short was in use from at least the mid4. Short seller retains as prot the $200 dierence be- nineteenth century. It is commonly understood that
tween the price at which he sold the shares he owned short is used because the short-seller is in a decit posiand the lower price at which he was able to repur- tion with his brokerage house. Jacob Little was known as
chase the shares.
The Great Bear of Wall Street who began shorting stocks
in the United States in 1822.[7]
Short sellers were blamed for the Wall Street Crash of
1929.[8] Regulations governing short selling were implemented in the United States in 1929 and in 1940. PoShares in ACME Inc. currently trade at $10 per share.
litical fallout from the 1929 crash led Congress to en1. A short seller borrows 100 shares of ACME Inc. and act a law banning short sellers from selling shares during a downtick; this was known as the uptick rule, and
immediately sells them for a total of $1,000.
this was in eect until 3 July 2007 when it was removed
2. Subsequently the price of the shares rises to $25.
by the Securities and Exchange Commission (SEC Re1.1.3

Loss-making trade

3.1

Shorting stock in the U.S.

lease No. 34-55970).[9] President Herbert Hoover con- Short selling stock consists of the following:
demned short sellers and even J. Edgar Hoover said he
would investigate short sellers for their role in prolong The speculator instructs the broker to sell the shares
ing the Depression. A few years later, in 1949, Alfred
and the proceeds are credited to his brokers account
Winslow Jones founded a fund (that was unregulated)
at the rm upon which the rm can earn interest.
that bought stocks while selling other stocks short, hence
Generally, the short seller does not earn interest on
hedging some of the market risk, and the hedge fund was
the short proceeds and cannot use or encumber the
born.[10]
proceeds for another transaction.[17]
Negative news, such as litigation against a company, may
also entice professional traders to sell the stock short in
Upon completion of the sale, the investor has 3 days
hope of the stock price going down.
(in the US) to borrow the shares. If required by law,
the investor rst ensures that cash or equity is on
During the Dot-com bubble, shorting a start-up company
deposit with his brokerage rm as collateral for the
could backre since it could be taken over at a price higher
initial short margin requirement. Some short sellthan the price at which speculators shorted. Short-sellers
ers, mainly rms and hedge funds, participate in the
were forced to cover their positions at acquisition prices,
practice of naked short selling, where the shorted
while in many cases the rm often overpaid for the startshares
are not borrowed or delivered.
up.

2.1

Naked short selling restrictions

During the 2008 nancial crisis, critics argued that investors taking large short positions in struggling nancial
rms like Lehman Brothers, HBOS and Morgan Stanley created instability in the stock market and placed additional downward pressure on prices. In response, a
number of countries introduced restrictive regulations on
short-selling in 2008 and 2009. Naked short selling is
the practice of short-selling a tradable asset without rst
borrowing the security or ensuring that the security can
be borrowed it was this practice that was commonly
restricted.[11][12] Investors argued that it was the weakness of nancial institutions, not short-selling, that drove
stocks to fall.[13] In September 2008, the Securities Exchange Commission in the United States abruptly banned
short sales, primarily in nancial stocks, to protect companies under siege in the stock market. That ban expired
several weeks later as regulators determined the ban was
not stabilizing the price of stocks.[13][12]

The speculator may close the position by buying

back the shares (called covering). If the price has
dropped, he makes a prot. If the stock advanced,
he takes a loss.
Finally, the speculator may return the shares to the
lender or stay short indenitely.
At any time, the lender may call for the return of
his shares e.g. because he wants to sell them. The
borrower must buy shares on the market and return
them to the lender (or he must borrow the shares
from elsewhere). When the broker completes this
transaction automatically, it is called a 'buy-in'.

3.1 Shorting stock in the U.S.

In the U.S., in order to sell stocks short, the seller must arrange for a broker-dealer to conrm that it is able to make
delivery of the shorted securities. This is referred to as a
locate. Brokers have a variety of means to borrow stocks
Temporary short-selling bans were also introduced in the in order to facilitate locates and make good delivery of
United Kingdom, Germany, France, Italy and other Eu- the shorted security.
ropean countries in 2008 to minimal eect.[14] Australia
moved to ban naked short selling entirely in September The vast majority of stocks borrowed by U.S. brokers
2008.[11] Germany placed a ban on naked short selling of come from loans made by the leading custody banks and
certain euro zone securities in 2010.[15] Spain and Italy in- fund management companies (see list below). Institutroduced short selling bans in 2011 and again in 2012.[16] tions often lend out their shares in order to earn a little exWorldwide, economic regulators seem inclined to restrict tra money on their investments. These institutional loans
short selling to decrease potential downward price cas- are usually arranged by the custodian who holds the secucades. Investors continue to argue this only contributes rities for the institution. In an institutional stock loan, the
borrower puts up cash collateral, typically 102% of the
to market ineciency.[11]
value of the stock. The cash collateral is then invested by
the lender, who often rebates part of the interest to the
borrower. The interest that is kept by the lender is the
compensation to the lender for the stock loan.
3 Mechanism
See also: Securities lending

Brokerage rms can also borrow stocks from the accounts

of their own customers. Typical margin account agreements give brokerage rms the right to borrow customer

4
shares without notifying the customer. In general, brokerage accounts are only allowed to lend shares from accounts for which customers have debit balances, meaning they have borrowed from the account. SEC Rule
15c3-3 imposes such severe restrictions on the lending of
shares from cash accounts or excess margin (fully paid
for) shares from margin accounts that most brokerage
rms do not bother except in rare circumstances. (These
restrictions include that the broker must have the express
permission of the customer and provide collateral or a
letter of credit.)

MECHANISM

3.3 Sources of short interest data

Time delayed short interest data (for legally shorted

shares) is available in a number of countries, including
the US, the UK, Hong Kong, and Spain. The number of
stocks being shorted on a global basis has increased in recent years for various structural reasons (e.g. the growth
of 130/30 type strategies, short or bear ETFs). The data is
typically delayed; for example, the NASDAQ requires its
broker-dealer member rms to report data on the 15th of
each month, and then publishes a compilation eight days
[18]
Most brokers will allow retail customers to borrow shares later.
to short a stock only if one of their own customers has Some market data providers (like Data Explorers and
purchased the stock on margin. Brokers will go through SunGard Financial Systems[19] ) believe that stock lendthe locate process outside their own rm to obtain bor- ing data provides a good proxy for short interest levels
rowed shares from other brokers only for their large insti- (excluding any naked short interest). SunGard provides
tutional customers.
daily data on short interest by tracking the proxy variables
[20]
Stock exchanges such as the NYSE or the NASDAQ typ- based on borrowing and lending data which it collects.
ically report the short interest of a stock, which gives
the number of shares that have been legally sold short
as a percent of the total oat. Alternatively, these can
also be expressed as the short interest ratio, which is the
number of shares legally sold short as a multiple of the
average daily volume. These can be useful tools to spot
trends in stock price movements but in order to be reliable, investors must also ascertain the number of shares
brought into existence by naked shorters. Speculators are
cautioned to remember that for every share that has been
shorted (owned by a new owner), a 'shadow owner' exists
(i.e. the original owner) who also is part of the universe
of owners of that stock, i.e. Despite not having any voting rights, he has not relinquished his interest and some
rights in that stock.

3.4 Short selling terms

Days to Cover (DTC) is a numerical term that describes
the relationship between the number of shares in a given
equity that has been legally short-sold and the number of
days of typical trading that it would require to 'cover' all
legal short positions outstanding. For example, if there
are ten million shares of XYZ Inc. that are currently
legally short-sold and the average daily volume of XYZ
shares traded each day is one million, it would require ten
days of trading for all legal short positions to be covered
(10 million / 1 million).

Short Interest is a numerical term that relates the number of shares in a given equity that have been legally
shorted divided by the total shares outstanding for the
company, usually expressed as a percent. For example, if
there are ten million shares of XYZ Inc. that are currently
legally short sold, and the total number of shares issued by
3.2 Securities lending
the company is one hundred million, the Short Interest is
10% (10 million / 100 million). If however, shares are being created through naked short selling, fails data must
Main article: Securities lending
be accessed to assess accurately the true level of short inWhen a security is sold, the seller is contractually obliged terest.
to deliver it to the buyer. If a seller sells a security short Borrow cost is the fee paid to a securities lender for borwithout owning it rst, the seller needs to borrow the se- rowing the stock or other security. The cost of borrowing
curity from a third party to fulll its obligation. Other- the stock is usually negligible compared to fees paid and
wise, the seller will fail to deliver, the transaction will interest accrued on the margin account - in 2002, 91% of
not settle, and the seller may be subject to a claim from stocks could be shorted for less than a 1% fee per annum,
its counterparty. Certain large holders of securities, such generally lower than interest rates earned on the margin
as a custodian or investment management rm, often lend account. However, certain stocks become hard to borout these securities to gain extra income, a process known row as stockholders willing to lend their stock become
as securities lending. The lender receives a fee for this more dicult to locate. The cost of borrowing these
service. Similarly, retail investors can sometimes make stocks can become signicant - in February 2001, the cost
an extra fee when their broker wants to borrow their se- to borrow (short) Krispy Kreme stock reached an annualcurities. This is only possible when the investor has full ized 55%, indicating that a short seller would need to pay
title of the security, so it cannot be used as collateral for the lender more than half the price of the stock over the
margin buying.
course of the year, essentially as interest for borrowing

5
a stock in limited supply.[21] This has important implica- stringent were put in place in September 2008, ostensitions for derivatives pricing and strategy, as the borrow bly to prevent the practice from exacerbating market decost itself can become a signicant convenience yield for clines. The rules were made permanent in 2009.
holding the stock (similar to additional dividend) - for instance, put-call parity relationships are broken and the
early exercise feature of American call options on non- 4 Fees
dividend paying stocks can become rational to exercise
early, which otherwise would not be economical.[22]
When a broker facilitates the delivery of a clients short
sale, the client is charged a fee for this service, usually a
standard commission similar to that of purchasing a sim3.4.1 Major lenders
ilar security.
State Street Corporation (Boston, United States)
If the short position begins to move against the holder of
the short position (i.e., the price of the security begins to
Merrill Lynch (New Jersey, United States)
rise), money will be removed from the holders cash balance and moved to his or her margin balance. If short
JP Morgan Chase (New York, United States)
shares continue to rise in price, and the holder does not
Northern Trust (Chicago, United States)
have sucient funds in the cash account to cover the position, the holder will begin to borrow on margin for this
Fortis (Amsterdam, Netherlands, now defunct)
purpose, thereby accruing margin interest charges. These
ABN AMRO (Amsterdam, Netherlands, formerly are computed and charged just as for any other margin
debit. Therefore, only margin accounts can be used to
Fortis)
open a short position.
Citibank (New York, United States)
When a securitys ex-dividend date passes, the dividend
Bank of New York Mellon Corporation (New York, is deducted from the shortholders account and paid to the
person from whom the stock is borrowed.
United States)
For some brokers, the short seller may not earn interest on
UBS AG (Zurich, Switzerland)
the proceeds of the short sale or use it to reduce outstanding margin debt. These brokers may not pass this benet
Barclays (London, United Kingdom)
on to the retail client unless the client is very large. The
interest is often split with the lender of the security.

3.5

Naked short selling

Main article: Naked short selling

5 Dividends and voting rights

A naked short sale occurs when a security is sold short

without borrowing the security within a set time (for example, three days in the US.) This means that the buyer of
such a short is buying the short-sellers promise to deliver
a share, rather than buying the share itself. The shortsellers promise is known as a hypothecated share.

Where shares have been shorted and the company which

issues the shares distributes a dividend, the question arises
as to who receives the dividend. The new buyer of the
shares, who is the holder of record and holds the shares
outright, will receive the dividend from the company.
However, the lender, who may hold its shares in a margin
account with a prime broker and is unlikely to be aware
that these particular shares are being lent out for shorting, also expects to receive a dividend. The short seller
will therefore pay to the lender an amount equal to the
dividend in order to compensate, though as this payment
does not come from the company it is not technically a
dividend as such. The short seller is therefore said to be
short the dividend.

When the holder of the underlying stock receives a dividend, the holder of the hypothecated share would receive
an equal dividend from the short seller.

Naked shorting has been made illegal except where allowed under limited circumstances by market makers. It
is detected by the Depository Trust & Clearing Corporation (in the US) as a failure to deliver or simply fail.
While many fails are settled in a short time, some have A similar issue comes up with the voting rights attached to
been allowed to linger in the system.
the shorted shares. Unlike a dividend, voting rights canIn the US, arranging to borrow a security before a short not legally be synthesized and so the buyer of the shorted
sale is called a locate. In 2005, to prevent widespread share, as the holder of record, controls the voting rights.
failure to deliver securities, the U.S. Securities and Ex- The owner of a margin account from which the shares
change Commission (SEC) put in place Regulation SHO, were lent will have agreed in advance to relinquish votintended to prevent speculators from selling some stocks ing rights to shares during the period of any short sale.[23]
short before doing a locate. Requirements that are more As noted earlier, victims of Naked Shorting sometimes

7 RISKS

report that the number of votes cast is greater than the futures or options; the preceding method is used to bet on
number of shares issued by the company.[24]
the spot price, which is more directly analogous to selling
a stock short.

6
6.1

Markets
Futures and options contracts

When trading futures contracts, being 'short' means having the legal obligation to deliver something at the expiration of the contract, although the holder of the short
position may alternately buy back the contract prior to expiration instead of making delivery. Short futures transactions are often used by producers of a commodity to
x the future price of goods they have not yet produced.
Shorting a futures contract is sometimes also used by
those holding the underlying asset (i.e. those with a long
position) as a temporary hedge against price declines.
Shorting futures may also be used for speculative trades,
in which case the investor is looking to prot from any
decline in the price of the futures contract prior to expiration.

7 Risks
Note: this section does not apply to currency markets.

Short selling is sometimes referred to as a negative income investment strategy because there is no potential
for dividend income or interest income. Stock is held
only long enough to be sold pursuant to the contract,
and ones return is therefore limited to short term capital
gains, which are taxed as ordinary income. For this reason, buying shares (called going long) has a very dierent risk prole from selling short. Furthermore, a longs
losses are limited because the price can only go down to
zero, but gains are not, as there is no limit, in theory, on
how high the price can go. On the other hand, the short
sellers possible gains are limited to the original price of
the stock, which can only go down to zero, whereas the
An investor can also purchase a put option, giving that loss potential, again in theory, has no limit. For this reainvestor the right (but not the obligation) to sell the un- son, short selling probably is most often used as a hedge
derlying asset (such as shares of stock) at a xed price. In strategy to manage the risks of long investments.
the event of a market decline, the option holder may ex- Many short sellers place a "stop order" with their stockercise these put options, obliging the counterparty to buy broker after selling a stock short. This is an order to the
the underlying asset at the agreed upon (or strike) price, brokerage to cover the position if the price of the stock
which would then be higher than the current quoted spot should rise to a certain level, in order to limit the loss and
price of the asset.
avoid the problem of unlimited liability described above.
In some cases, if the stocks price skyrockets, the stockbroker may decide to cover the short sellers position im6.2 Currency
mediately and without his consent, in order to guarantee
that the short seller will be able to make good on his debt
Selling short on the currency markets is dierent from of shares.
selling short on the stock markets. Currencies are traded
in pairs, each currency being priced in terms of another. Short sellers must be aware of the potential for a short
In this way, selling short on the currency markets is iden- squeeze. When the price of a stock rises signicantly,
some people who are shorting the stock will cover their
tical to going long on stocks.
positions to limit their losses (this may occur in an autoNovice traders or stock traders can be confused by the mated way if the short sellers had stop-loss orders in place
failure to recognize and understand this point: a contract with their brokers); others may be forced to close their
is always long in terms of one medium and short another. position to meet a margin call; others may be forced to
When the exchange rate has changed, the trader buys the cover, subject to the terms under which they borrowed the
rst currency again; this time he gets more of it, and pays stock, if the person who lent the stock wishes to sell and
back the loan. Since he got more money than he had bor- take a prot. Since covering their positions involves buyrowed initially, he makes money. Of course, the reverse ing shares, the short squeeze causes an ever further rise
in the stocks price, which in turn may trigger additional
can also occur.
covering. Because of this, most short sellers restrict their
An example of this is as follows: Let us say a trader wants activities to heavily traded stocks, and they keep an eye
to trade with the US dollar and the Indian rupee curren- on the short interest levels of their short investments.
cies. Assume that the current market rate is USD 1 to Short interest is dened as the total number of shares that
Rs.50 and the trader borrows Rs.100. With this, he buys have been legally sold short, but not covered. A short
USD 2. If the next day, the conversion rate becomes squeeze can be deliberately induced. This can happen
USD 1 to Rs.51, then the trader sells his USD 2 and gets when large investors (such as companies or wealthy indiRs.102. He returns Rs.100 and keeps the Rs.2 prot (mi- viduals) notice signicant short positions, and buy many
nus fees).
shares, with the intent of selling the position at a prot to
One may also take a short position in a currency using the short sellers who will be panicked by the initial uptick

8.2

Arbitrage

or who are forced to cover their short positions in order

to avoid margin calls.
Another risk is that a given stock may become hard to
borrow. As dened by the SEC and based on lack of
availability, a broker may charge a hard to borrow fee
daily, without notice, for any day that the SEC declares
a share is hard to borrow. Additionally, a broker may be
required to cover a short sellers position at any time (buy
in). The short seller receives a warning from the broker
that he is failing to deliver stock, which will lead to the
buy-in.[25]
Because short sellers must deliver the shorted securities
to their broker eventually, and will need money to buy
them, there is a credit risk for the broker. The penalties
for failure to deliver on a short selling contract inspired
nancier Daniel Drew to warn: He who sells what isn't
hisn, Must buy it back or go to prisn. To manage its
own risk, the broker requires the short seller to keep a
margin account, and charges interest of between 2% and
8% depending on the amounts involved.[26]

7
can create substantial bond positions. The largest
risk is that interest rates overall move. The trader
can hedge this risk by selling government bonds
short against his long positions in corporate bonds.
In this way, the risk that remains is credit risk of the
corporate bonds.
An options trader may short shares in order to remain delta neutral so that he is not exposed to risk
from price movements in the stocks that underlie his
options

8.2 Arbitrage
Further information: Arbitrage
A short seller may be trying to benet from market inefciencies arising from the mispricing of certain products.
Examples of this are

In 2011, the eruption of the massive China stock frauds

on North American equity markets brought a related risk
to light for the short seller. The eorts of research An arbitrageur who buys long futures contracts on a
oriented short sellers to expose these frauds eventually
US Treasury security, and sells short the underlying
prompted NASDAQ, NYSE and other exchanges to imUS Treasury security.
pose sudden, lengthy trading halts that froze the values
of shorted stocks at articially high values. Reportedly in
some instances, brokers charged short sellers excessively
large amounts of interest based on these high values as the 8.3 Against the box
shorts were forced to continue their borrowings at least
One variant of selling short involves a long position.
until the halts were lifted.[27]
Selling short against the box consists of holding a long
Short sellers tend to temper overvaluation by selling into
position on which the shares have already risen, whereexuberance. Likewise, short sellers are said to provide
upon one then enters a short sell order for an equal amount
price support by buying when negative sentiment is exof shares. The term box alludes to the days when a safe
acerbated after a signicant price decline. Short selling
deposit box was used to store (long) shares. The purpose
can have negative implications if it causes a premature or
of this technique is to lock in paper prots on the long
unjustied share price collapse when the fear of cancelposition without having to sell that position (and possilation due to bankruptcy becomes contagious.[28]
bly incur taxes if said position has appreciated). Once
the short position has been entered, it serves to balance
the long position taken earlier. Thus, from that point in
8 Strategies
time, the prot is locked in (less brokerage fees and short
nancing costs), regardless of further uctuations in the
underlying share price. For example, one can ensure a
8.1 Hedging
prot in this way, while delaying sale until the subsequent
tax year.
Further information: Hedge (nance)
Hedging often represents a means of minimizing the risk
from a more complex set of transactions. Examples of
this are:
A farmer who has just planted his wheat wants to
lock in the price at which he can sell after the harvest. He would take a short position in wheat futures.
A market maker in corporate bonds is constantly
trading bonds when clients want to buy or sell. This

U.S. investors considering entering into a short against

the box transaction should be aware of the tax consequences of this transaction. Unless certain conditions are
met, the IRS deems a short against the box position to
be a constructive sale of the long position, which is a
taxable event. These conditions include a requirement
that the short position be closed out within 30 days of the
end of the year and that the investor must hold their long
position, without entering into any hedging strategies, for
a minimum of 60 days after the short position has been
closed.[29]

9
9.1

11

Regulations
United States

SEE ALSO

banned short selling,[38] and later placed an indenite ban

on naked short selling.[39] Australias ban on short selling was further extended for another 28 days on 21 October 2008.[40] Also during September 2008, Germany,
Ireland, Switzerland and Canada banned short selling
leading nancial stocks,[41] and France, the Netherlands
and Belgium banned naked short selling leading nancial
stocks.[42] By contrast with the approach taken by other
countries, Chinese regulators responded by allowing short
selling, along with a package of other market reforms.[43]

The Securities and Exchange Act of 1934 gave the

Securities and Exchange Commission the power to regulate short sales.[30] The rst ocial restriction on short
selling came in 1938, when the SEC adopted a rule known
as the uptick rule that dictated that a short sale could only
be made when the price of a particular stock was higher
than the previous trade price. The uptick rule aimed to
prevent short sales from causing or exacerbating market
price declines.[31] In January 2005, The Securities and 10 Views of short selling
Exchange Commission enacted Regulation SHO to target abusive naked short selling. Regulation SHO was the Advocates of short selling argue that the practice is an esSECs rst update to short selling restrictions since the sential part of the price discovery mechanism.[44] Finanuptick rule in 1938.[32][33]
cial researchers at Duke University said in a study that
The regulation contains two key components: the lo- short interest is an indicator of poor future stock perforcate and the close-out. The locate component attempts mance (the self-fullling aspect) and that short sellers ex[45]
to reduce failure to deliver securities by requiring a bro- ploit market mistakes about rms fundamentals.
ker possess or have arranged to possess borrowed shares. Such noted investors as Seth Klarman and Warren BufThe close out component requires that a broker be able fett have said that short sellers help the market. Klarman
to deliver the shares that are to be shorted.[31][34] In the argued that short sellers are a useful counterweight to the
US, initial public oers (IPOs) cannot be sold short for widespread bullishness on Wall Street,[46] while Buett
a month after they start trading. This mechanism is in believes that short sellers are useful in uncovering fraudplace to ensure a degree of price stability during a com- ulent accounting and other problems at companies.[47]
panys initial trading period. However, some brokerage
rms that specialize in penny stocks (referred to collo- Shortseller James Chanos received widespread publicity
an early critic of the accounting practices
quially as bucket shops) have used the lack of short sell- when he was
[48]
of
Enron.
Chanos
responds to critics of short-selling
ing during this month to pump and dump thinly traded
by
pointing
to
the
critical
role they played in identifying
IPOs. Canada and other countries do allow selling IPOs
problems
at
Enron,
Boston
Market and other nancial
[35]
(including U.S. IPOs) short.
disasters over the years.[49] In 2011, research oriented
The Securities and Exchange Commission initiated a short sellers were widely acknowledged for exposing the
temporary ban on short selling on 799 nancial stocks China stock frauds.[50]
from 19 September 2008 until 2 October 2008. Greater
penalties for naked shorting, by mandating delivery of Commentator Jim Cramer has expressed concern about
calling for the reinstocks at clearing time, were also introduced. Some state short selling and started a petition
[51]
troduction
of
the
uptick
rule.
Books
like Don't Blame
governors have been urging state pension bodies to refrain
the
Shorts
by
Robert
Sloan
and
Fubarnomics
by Robert
[36]
from lending stock for shorting purposes.
An assessE.
Wright
suggest
Cramer
exaggerated
the
costs
of short
ment of the eect of the temporary ban on short-selling
selling
and
underestimated
the
benets,
which
may
inin the United States and other countries in the wake of
clude
the
ex
ante
identication
of
asset
bubbles.
the nancial crisis showed that it had only little impact
on the movements of stocks, with stock prices moving in Individual short sellers have been subject to criticism and
the same way as they would have moved anyhow, but the even litigation. Manuel P. Asensio, for example, engaged
ban reduced volume and liquidity.[14]
in a lengthy legal battle with the pharmaceutical manufacturer Hemispherx Biopharma.[52]

9.2

Europe, Australia and China

In the UK, the Financial Services Authority had a moratorium on short selling 29 leading nancial stocks, effective from 2300 GMT, 19 September 2008 until 16
January 2009.[37] After the ban was lifted, John McFall,
chairman of the Treasury Select Committee, House of
Commons, made clear in public statements and a letter
to the FSA that he believed it ought to be extended. Between 19 and 21 September 2008, Australia temporarily

Several studies of the eectiveness of short selling bans

indicate that short selling bans do not contribute to more
moderate market dynamics.[53][54][55][56]

11 See also
Inverse exchange-traded fund
Magnetar Capital

9
Repurchase agreement

[14] Oakley, David (18 December 2008). Short-selling ban

has minimal eect. Financial Times. Retrieved 12
September 2012.

Socially responsible investing

Straddle

[15] Crawford, Alan (18 May 2010). Germany to Temporarily Ban Naked Short Selling, Some Swaps of Euro Bonds.
Bloomberg. Retrieved 13 September 2012.

Manuel P. Asensio
James Chanos
Anthony Elgindy

[16] Tracy Rucinski and Stephen Jewkes (23 July 2012).

Spain, Italy reinstate short-selling ban. Reuters. Retrieved 12 September 2012.

Joseph Parnes

[17] Federal Reserve Board. Regulation T 220.12

Margin

[18] NASDAQ. About the Short Interest Page.

[19] SunGards ShortSide.com discusses the product.

12

Notes

[1] Understanding Short Selling - A Primer.

set.com. Retrieved 24 May 2012.

Langas-

[2] Larry Harris (2002). Trading and Exchange: Market Microstructure for Practitioners. Oxford University Press.
p. 41. ISBN 0195144708.
[3] Don M. Chance and Robert Brooks. An Introduction to
Derivatives and Risk Management. South-Western College. p. 6. ISBN 0324601204.
[4] NRC Handelsblad - Naked short selling is an old-Dutch
trick (in Dutch only) Archived 31 May 2013 at the
Wayback Machine
[5] Stringham, Edward (2003). The Extralegal Development of Securities Trading in Seventeenth Century Amsterdam. Quarterly Review of Economics and Finance 43
(2): 321. Retrieved 12 January 2015.
[6] Moritz College of Law (PDF). osu.edu.
[7] Scripophily - PSTA - Professional Scripophily Trade Association. Encyberpedia.com. Retrieved 24 May 2012.
[8] Short sellers have been the villain for 400 years. Reuters.
26 September 2008. Retrieved 28 September 2008.
[9] SEC Release No. 34-55970 (PDF). Retrieved 24 May
2012.
[10] Lindgren, Hugo (9 April 2007). New York Magazine
- The Creation of the Hedge Fund. Nymag.com. Retrieved 24 May 2012.
[11] Lavinio, Stefano (1999). The Hedge Fund Handbook:
A Denitive Guide for Analyzing and Evaluating Alternative Investments. McGraw-Hill. pp. 442443. ISBN
0071350306.
[12] Madura, Je (2009). Financial Markets and Institutions. South-Western College Publishing. p. 308. ISBN
1439038848.
[13] Harris, Larry (7 October 2008). A Debate as a Ban on
Short-Selling Ends: Did It Make Any Dierence?". The
New York Times. Retrieved 12 September 2012.

[20] SunGard. SunGard Launches Borrow Indices; First Proxy

for Measuring Short Interest on a Daily Basis. Business
Wire.
[21] The market for borrowing stock (PDF). Retrieved 25
December 2012.
[22] Lecture 13: Hard to Borrow Securities (PDF). Retrieved 25 December 2012.
[23] What happens to the voting rights on shares when the
shares are used in a short sale transaction?". Investopedia.
Retrieved 4 December 2008.
[24] Greg LandContactAll Articles (15 May 2009). Overvoting at Taser in 2005. Law.com. Retrieved 24 May
2012.
[25] Arnold, Roger (14 January 2000). Knowing the Rules of
the Shorting Game. TheStreet. Retrieved 24 May 2012.
[26] margin account rates schedule. ScotTrade. 18 June
2011.
[27] Even Short-Sellers Burned by Chinese Shares. Barrons.
18 June 2011.
[28] The Theory and Practice of Short Selling, Chapter 9,
Conclusions and Implications for Investors by Frank J.
Fabozzi, Editor. Books.google.com. Retrieved 24 May
2012.
[29] United States IRS Publication 550 Investment Income
and Expenses. Irs.gov. Retrieved 24 May 2012.
[30] Securities Exchange Act of 1934 (PDF). Securities and
Exchange Commission. 1934.
[31] Lavinio, Stefano (1999). The Hedge Fund Handbook:
A Denitive Guide for Analyzing and Evaluating Alternative Investments. McGraw-Hill. pp. 8595. ISBN
0071350306.
[32] S.K. Singh (2009). Bank Regulations. Discovery Publishing House. pp. 122123. ISBN 818356447X.
[33] U.S. SEC (11 April 2005). Division of Market Regulation: Key Points about Regulation SHO.

10

14

[34] Young, Matthew G. (2010). The Complete Guide to

Selling Stocks Short: Everything You Need to Know Explained Simply. Atlantic Publishing Group Inc. pp.
178179. ISBN 1601383266.
[35] Mahipal Singh (2011). Security Analysis with Investment and Portfolio Management. Gyan Books. p. 233.
ISBN 8182055199.
[36] Tsang, Michael (19 September 2008). Short Sellers under Fire in U.S., U.K. After AIG Fall. bloomberg.com.
[37] BBC (18 September 2008). FSA clamps down on shortselling. BBC News. Retrieved 4 January 2010.

EXTERNAL LINKS

[54] Lobanova O, Hamid S. S. and Prakash A. J. (2010) The

impact of short-sale restrictions on volatility, liquidity, and
market eciency: the evidence from the short-sale ban in
the u.s. Technical report, Florida International University
- Department of Finance.
[55] Beber A. and Pagano M. (2009) Short-selling bans
around the world: Evidence from the 2007-09 crisis.
CSEF Working Papers 241, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
[56] Kerbl S (2010) Regulatory Medicine Against Financial Market Instability: What Helps And What Hurts?"
arXiv.org.

[38] The Australian. 2 October 2008.

[39] ASX ban on short selling is indenite. The Sydney
Morning Herald. 3 October 2008.
[40] Australian Securities and Investments Commission 08-210 ASIC extends ban on covered short selling.
Asic.gov.au. Retrieved 24 May 2012.
[41] McDonald, Sarah (22 September 2008). Australian short
selling ban goes further than other bourses. National
Business Review. Retrieved 9 November 2011.
[42] Ram, Vidya (22 September 2008). Europe Spooked By
Revenge Of The Commodities. Forbes.
[43] Shen, Samuel (5 October 2008). UPDATE 2-China to
launch stocks margin trade, short sales. Reuters.
[44] Short Sale Constraints And Stock Returns by C.M Jones
and O.A. Lamont. Papers.ssrn.com. 20 September
2001. doi:10.2139/ssrn.281514. Retrieved 24 May 2012.
[45] Do Short Sellers Convey Information About Changes in
Fundamentals or Risk?" (PDF). Retrieved 24 May 2012.
[46] Margin of safety (1991), by Seth Klarman. ISBN 088730-510-5
[47] Casterline, Rick (1 June 2006).
2006 Berkshire
Hathaway Annual Meeting Q&A with Warren Buett.
Fool.com. Retrieved 24 May 2012.
[48] Peterson, Jim (6 July 2002). Balance Sheet : The silly
season isn't over yet. The New York Times. Archived
from the original on 31 May 2013. Retrieved 9 August
2009.
[49] Contrarian Investor Sees Economic Crash in China
[50] Alpert, Bill (18 June 2011). B. Alpert Even Short Sellers Burned by Chinese Shares (Barrons 20110618)". Online.barrons.com. Retrieved 24 May 2012.
[51] TheStreet. TheStreet. Retrieved 24 May 2012.
[52] Nelson, Brett (26 November 2001).
Forbes. Retrieved 9 August 2009.

Short Story.

[53] Marsh I and Niemer N (2008) The impact of short

sales restrictions. Technical report, commissioned and
funded by the International Securities Lending Association (ISLA) the Alternative Investment Management Association (AIMA) and London Investment Banking Association (LIBA).

13 References
Sloan, Robert. Don't Blame the Shorts: Why
Short Sellers Are Always Blamed for Market Crashes
and Why History Is Repeating Itself, (New York:
McGraw-Hill Professional, 2009). ISBN 978-0-07163686-5
Wright, Robert E. Fubarnomics: A Lighthearted,
Serious Look at Americas Economic Ills, (Bualo,
N.Y.: Prometheus, 2010). ISBN 978-1-61614-1912
Fleckner, Andreas M. 'Regulating Trading Practices' in The Oxford Handbook of Financial Regulation (Oxford: Oxford University Press, 2015). ISBN
978-0-19-968720-6

14 External links
Porsche VW Shortselling Scandal
Short-Selling Bans Dampen 130/30 Strategies
Worldwide, Global Investment Technology, Sept.
29, 2008
Short Selling Introduction
Short Interest: What it tells us
SEC Discussion of Naked Short Selling

11

15
15.1

Text and image sources, contributors, and licenses

Text

Short (nance) Source: https://en.wikipedia.org/wiki/Short_(finance)?oldid=699107205 Contributors: Damian Yerrick, Mav, Maury

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