Douglas Branson on The Fallout from the Bailout
On March 22, Professor Douglas Branson was the keynote speaker at a day-long symposium at the University of Dayton School of Law. The subject of the symposium was “The Fallout from the Bailout: The Impact of the 2008 Bailout on Lending Regulation, Securities Regulation, and legal Ethics.” Professor Branson’s presentation was “The Economic Crisis – Taking the Long View.” He also posted on the Social Science Research Network an article entitled “Nibbling Around the Edges – The Regulation of Short Selling: Stock Borrowing and Restoration of An Uptick Rule.” Download it here. The abstract:
Many knowledgeable observers ascribe recent share price volatility to short selling, which has increased 4 or more times the historical 4% short interest in most large cap stocks. Much of this short selling has been naked short selling in which, contrary to SEC and stock exchange rules, short sellers sell stock without having first borrowed it and frequently with no intention of ever borrowing it in the future. Through Regulation SHO, which took effect in 2006, and then further efforts in August-October, 2008, the SEC initiated and then ratcheted up its campaign against naked short selling. The crackdown on naked short selling has increased the imperative that a short must borrow stock before selling it. This article asks whether or not stock borrowing from an individual investor is an investment contract, and therefore a security, or should be regulated in some other way. The article also disagrees with 35 years' academic commentary, which asserted that the uptick rule was harmful an should be eliminated as contrary to marklet efficiency. That commentary was wrong because, uniformly, it equates informational efficiency with overall market efficiency when a truly efficient market will exhibit both price continuity, to which an uptick rule would contribute, as well as some level of informational efficiency, which short selling aids.