Office of Global Research and Markets at the Managed Funds Association

Market Impact of Short Sale Position Disclosures

It is well documented in economic research that short selling is an important mechanism for effective price discovery and therefore it is also beneficial for market efficiency. However, short selling is still regarded as controversial by policy officials and stakeholders because investors benefit when prices decline.

This paper examines the impact of short sale disclosure rules in the European Union and United Kingdom which were implemented in 2012. This market monitoring provision requires individual investors to publicly disclose short positions in shares of publicly listed companies where those positions are equal to or greater than 0.5% of issued share capital. This disclosure requirement might affect an investor’s decision to take a significant short position because it introduces a second, fundamentally different, question for investors considering a short position:

As such, the individual investor public disclosure threshold creates a disincentive for investors to build short positions.

The impact of the public disclosure requirement and its expected impact on market efficiency has been examined in several economic research papers in the past. This paper will update these findings and contribute to the knowledge base with estimations on short selling’s impact on market efficiency in relation to the individual investor public disclosure threshold.

The main conclusion of our study is that the public disclosure of short selling is likely to impair price discovery for two reasons:

The study is commissioned by the Office of Global Research and Markets at the Managed Funds Association.