short term bans: Intended impacts of 2008 short-sale ban (Essay Sample)

Short –Sale Ban
Institution
Date
Introduction
There have been various discussions about the results caused by the short sale bans as a regulatory tool especially in the times of financial drawbacks which included the intended and unintended results. This measure was put in place in order to stabilize the market. It is said that short selling contributed speculation and price manipulation, devaluating the precious assets causing self perpetuating price spirals. This discouraged the engagement of people in illegal market manipulation.
On the hand, short sale is said to be used by investors to point out their opinions on the prices thus liquidity of in the market. Both the regulators and investors have to pay keen attention to the effects posed by this tool, in reference to the 2008 ban caused both intended and unintended impacts as elaborated below.
Intended impacts of 2008 short-sale ban
The first result was that of short-selling speculation which was effective in reducing the short positions. Harris et al (2013) displays a clear distinction on the percentages taken by banned and non-banned stocks which recorded the decrease in the value of short –sale interest by 4% implying the reduction of short positions in the stipulated firms and also the reduction of collateral short interest in the market.
Also this improved the confidence of the investors. This triggered the perceptions of the investors of their future aggregate cash flows or riskiness and their level of willingness to go as per the stipulated prices in the market. The ban caused some inflation in the market due to the fact that some of the investors were not willing to risk.
Untended impacts of 2008 short- sale ban
This ban produced many unintended impacts. In academics it had positive market influence. On contrary, markets with active short sellers are more efficient than the one without. The first result is reduction in the market and impediment of the price discovery. This completed the cross-sectional predictability between the markets equity and other market which increased transaction costs for market participants and inefficient transfers between investors.
There was increase in the price of options. The liquidity demanding investor’s cost transactions increased drastically due to inflated bid- ask spreads.
We have also price inflation and wealth transfers. The ban impended speculators and negatively gave bias data on in terms of prices to the investors. The buyers were prone to purchase goods at inflated prices and sell at a loss causing a resultant wealth transfers.
Also we come across reduction in the level of short covering. The participants left the market due to the uncertainties caused by the ban where the investor had greater confidence in short positions available.
On the same, there was near fall of the convertible bond market. The investors were really putting their interest in shorting of corresponding common equity of the firms. With introduction of the ban which lead to significant reduction in investor’s participation in convertible bond market.