1.1 The recent global economic crisis has seen an unparallel shift in the global perception of free markets. Regulators around the world have adopted a more strict regulatory approach to markets than seen previously. Short selling is been given particular attention from authorities due to its speculative use and questionable moral nature. As in the past, “short selling has been a favourite whipping boy”.
1.2 This essay examines the current regulatory measures in place in New Zealand regarding short selling. This essay will also evaluate the policy arguments with reference to the United States of America’s regulations and the recent economic crisis. Furthermore, this essay will ultimately argue that minor adjustments to the current regulation are beneficial. But, overall, complex regulatory reform is unnecessary and would cause an overall negative effect on the whole market.
2. The purposes of short selling
2.1 Short selling is a relatively straight-forward concept. “An investor borrows a share of stock, from a broker, and sells it. Later, the short-seller must purchase a share of the same stock in order to replace the share that was borrowed...the short seller anticipates the stock price will fall, so that the share can be purchased later at a lower price than it initially sold for. There are two main forms of short selling: Conventional short selling and naked short selling. Conventional short selling is where the investor has the funds to cover their position. On the other hand, naked short selling is where the investor must borrow the funds to cover their position as mentioned above.
2.2 Investors who want to sell a stock short must, at least in case of conventional short selling, first find a party willing to lend the shares they intend to sell. Therefore, speaking of short selling, we also need to consider the structure of the equity lending market... [continues]
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