🔥 Will A Short-Selling Ban Save The Financial Markets?

7 mag 2023

With everything that's going on in the banking sector, the call for a short-selling ban has become louder. In this analysis I want to take a quick look at the last time the SEC imposed a short-selling ban and what the implications were.

Shortly after the Lehman Brothers collapse on the 15th of September in 2008, the SEC imposed a short-selling ban on virtually all big US stocks. This ban went into effect on the 19th of September.

The idea of the ban was to remove the financial benefit that speculators could get from others' losses. The idea was that if short-selling would be banned, investors would stop selling and it would keep the stock markets from falling further.

As seen on the chart, the short-selling ban lead (either directly or indirectly) to a massive crash in the stock market. In my view, this short-selling ban only made things worse:
1: Investors lost confidence in the system. "Something must be really wrong if the SEC bans short-selling".
2: Short-sellers have to buy back their positions when they take profits. This leads to buying pressure to arise once the price starts falling. If most people are shorting, chances are that the market will rebound hard at some point once those shorters start taking profits. By removing the ability to short, the market is filled with buyers who will exit their positions, leading to only downwards pressure.

So, will a short-selling ban save the markets? Likely not. Big chance it will only make things worse. In case a short-selling ban ever happens, be prepared and remember this analysis.