Home » Why GameStop events are still pertinent for short selling regulators

Why GameStop events are still pertinent for short selling regulators

by LLT Editor
18th Nov 21 11:26 am

As the European Securities and Markets Authority (ESMA), prepares to close its consultation paper on the review of Short Selling Regulations (SSR), Dave Feltes, Head of Financial Market Infrastructure at Capco, a global technology and management consultancy, welcomes the review in the wake of last year’s short selling bans across Europe and the Reddit-driven short squeeze on GameStop stock:

“During volatile market conditions last year, several European countries instituted bans on short selling of shares, ostensibly to quell large losses and temper volatility during a period of uncertainty and panic. Proponents of short-selling bans might argue that such bans prevent gamblers or speculators from bullying helpless companies during stress conditions and negatively impacting economic growth and shareholder value.

“In reality, short selling is an accepted market activity that positively impacts liquidity, dampens volatility, tightens bid/ask spreads, and makes prices more accurate, particularly when rules require firms to borrow shares before selling them. The ramifications of short selling bans instigated during the early months of Covid-19 caused spreads to widen and volatility to rise 10-20%. The UK did not implement such bans, and UK equity market liquidity and spreads were not similarly impacted.

“ESMA initiated a review of the short selling regulations (SSR) to properly review the guidance and framework around calls for emergency bans and the required disclosure of aggregated short positions. It is worth noting that the publicly available short disclosure helped exacerbate the GameStop meme, wherein retail stock traders on Reddit surmised that short-sellers could be squeezed if the relatively illiquid GameStop were to crowd-bid. This new aspect of retail equity trading should be analysed by the regulators.

“The SSR framework works well in many aspects, such as the prohibition of uncovered short selling, which dampens the ease of going short. Asset management industry groups also believe the regulation can be improved by the introduction of a centralised notification and publication system, which would lessen the reporting complexity and costs.”

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