1
1.
Introduction
Recent changes in United St
ates short sale regulation ha
ve been nothing short of
breathtaking. In a matter of
days, the shorting world has tu
rned upside-down. In July, the
Securities and Exchange Commission (SEC) issued an emergency order
restricting naked
shorting (where the short seller fails to borro
w shares and deliver them to the buyer on the
settlement date) in 19 financial
stocks. After the emergency or
der expired in mid-August, the
SEC returned on September 17 with
a total ban on naked shorting in
all U.S. stocks. Two days
later, following on the heels of
a similar announcement from th
e U.K.’s Financial Services
Authority, the SEC surprised the
market with a temporary emerge
ncy ban on all short sales in
over 800 financial stocks. On the same day, th
e Commission announced that all institutional
short sellers would have to re
port their daily sh
orting activity, and th
e Commission announced
aggressive investigations into pos
sible manipulation by short sellers.
Overall, it was quite a summer,
and it would be reasonable
to conclude that we are now
in uncharted regulatory waters.
But when stocks go down sharply,
it is actually a fairly common
response by regulators to try to th
row sand in the gears and limit s
horting activity. In fact, every
one of these recent regulatory act
ions has an antecedent from the
U.S. experience in the 1930’s.
Most of those initiatives were
introduced in 1931 and 1932 as st
ocks were in the process of
losing 90% of their peak 1929 valu
es. Perhaps the SEC was looki
ng back to that
decade for
guidance.
This paper examines several discrete events
in the U.S. in the 1930’s that made shorting
more difficult or impossible.
Short sellers were almost
immediately blamed. The New
York Stock Exchange’s initial re
sponse was to collect data from
members on short interest. As
of November 12, 1929, short interest in NYSE st
ocks was a minuscule 0.15% of outstanding
shares. By way of comparison, NYSE short in
terest on June 30, 2008 was 4.74% of shares
outstanding.
As prices continued to fall through 1930 a
nd into 1931, a noisy debate ensued. Shorting
opponents pressed for an outright ba
n in the press and in
the policy arena, while New York Stock
Exchange officials took the lead in defendi
ng the practice. The political pressure was
considerable. Members of the
US Congress introduced bills proh
ibiting shorting, and even J.
Edgar Hoover launched an inve
stigation into shorti
ng. While the Exchange
publicly defended
shorting, Exchange officials priv
ately encouraged members to minimize their
https://www0.gsb.columbia.edu/faculty/cjones/JonesShortingRestrictions4a.pdf
