An analysis of short selling in the European Union with particular focus on the COVID-19 pandemic

Abstract

This dissertation shall analyse the effects of Short Selling regulations and restrictions within the European Union with specific focus on the bans implemented by Malta, Germany, Italy and Spain during the COVID-19 pandemic. Short Selling is an investment practice by which an investor borrows a stock at a price at which he deems to be an overinflation of the stock’s worth, and then immediately sells it while it is still valued in this manner. If the investor’s assumption is correct, the stock will eventually drop in value and the investor will then repurchase the stock and return it to the lender. This way the investor has made a profit off of the stock by borrowing and selling through a process of speculation. Many countries have aimed to regulate short selling as they fear that since it is a trading strategy that bets on the downfall of financial institutions, short selling may cause a further downward spiral of share prices and thus the stock market. This was the reasoning behind the 2008 Financial Crisis Short Selling Bans and more recently the bans implemented during the COVID-19 pandemic. In 2012 the European Union enforced Regulation No. 235/2012 on Short Selling and other Aspects of Credit Default Swaps for the coordination of measures. Thus, in researching the objective of this dissertation, that is the effectiveness of having a framework which regulates Short Selling restrictions in the European Union, the author analyses this regulation along with the restrictions enforced by Member States during the COVID-19 pandemic. While Short selling bets on the downfall of financial institutions, through the research performed in this dissertation and several other studies referred to by the author which examine the effectiveness of said bans, one can conclude that Short Selling bans during the COVID-19 pandemic had no real benefit in maintaining the stability of the stock market. Therefore, the author questions the viability of short selling restrictions in the EU.