Macro & Markets
Global Macro Themes
Financial Market Themes

When Prices Go Down... Ban The Short Sellers

Talk of a short-selling ban has heated up once again, as yet another bank bites the dust. It is worth noting that the regulators did implement a short-selling ban in 2008, in an attempt to stem market drawdowns and risk. Ultimately, this proved to be rather ineffective, as markets continued to implode.

Fast forward to 2023, and the conversation has once again picked up steam. In the latest development, JP Morgan CEO Jamie Dimon spoke to Bloomberg on the issue.

Jamie believes regulators need to look at short-selling in banking stocks, going as far as potentially banning the activity. He concedes that ‘his folks tell him that short-selling is not the problem’, and I would agree with these folks. However, he believes they may partially be wrong, and indicates that there may be unscrupulous behavior, and that there may be collusion of short sellers (IE. take a short position, tweet, profit).

I would agree with Jamie’s point here as well. The type of behavior Jamie is describing is a form of market manipulation, and is already regulated and punished should regulators actually investigate.

However, when looking at the banking sector specifically, these 50% declines are not caused by short sellers entering positions… they are caused by large long positions unwinding. In addition, short selling is a very small percentage of all trading volume, in general. ‘Unscrupulous short selling behavior’ is an even smaller percentage of volume.

Banning a critical market function to target a small insignificant % of trading volume seems absurd, but maybe that’s just me. Instead, regulators might make an attempt to regulate and investigate parties that may be engaging in ‘unscrupulous short selling behavior.’

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