Question

This discussion is about the pros and cons of short selling. In 2008, the SEC temporarily banned short sales on financial stocks traded in U.S. markets. In the summer of 2011, a number of European countries adopted similar bans. Here are some examples of questions you might consider in your discussion: Are bans such as these a good idea? What are these bans supposed to accomplish? Are there certain times when a ban is a useful tool? Are short selling bans effective? Is short selling a good option for markets and economies? You may want to look for news articles or opinion pieces to guide and support your contributions to the thread. Make sure you include a reference to these articles if you use them.

Answer 1

Before discussing the pro and cons of the ban of short selling let us first know what short selling is

Short Sell Order: It is also known as short sell, in stock market you can sell a stock first and buy it later, trader will take this kind of trade when he predict that share price will slip down, so a trader will sell/short a share at high price and will buy when the price will go down.

For Example: CMP of the share is $200 and trader predict that its price will go down to $190 so the trader will SELL it at $200 and will buy it at $190 giving him a profit of $10.

Simply remember that you main objective in a share trading should be Buy Low and Sell High it does not matter in which order you do (i.e. Buy first at low price and sell at high price or Sell first at high price and buy it on low price)

Now let us Discuss was Banning Short Sell of financial stock during 2008 Crises was a Right step?

At the end of Christopher Cox term as chairman of the SEC, Christopher Cox said "the biggest mistake of his term was to implement a three-week ban on short-selling bank stocks at the height of the financial crisis in 2008"

Most of the market participant thinks that Short Selling is the work of a devil as they break the share price of the stock but the reality is completely different Short Seller play a important role in maintaining a Liquidity in the market which is very much Important for the Smooth running of Market; Just suppose that there are only buyer for a Share and there is no seller in this case the order of the buyer will not be executed because there is no seller in the market,

If we will see Ethically then also it is not wrong because in market if two people will not have opposite view then the market will not function and if you remove one participant from the market then their will be serious liquidity crunch.

Advantage of Short Selling

When the valuation of the stock become very inflated and stock starting trading at higher PE multiple Short Sellers are the one who comes to correct the price and valuation gap this process is also called "Bear Raid".

Generally during Bull run market start trading at very higher level and every stock no matter what their valuation is market start rewarding them and their price move to very high level and during this time Short Sellers give reality check to the market and bring the stock back to its correct or discounted valuation which gives now Investor a chance to invest money in the market in correct valuation.

Now the question comes If their are so many Advantage of the short selling then why they decided to ban it

The is due to political Interference; During an interview with CNBC, James Angel, associate professor of finance at Georgetown University said that "One of the problems with the regulatory system is that it has to respond to the political system and politicians don’t necessarily understand markets,” it was only done to showcase the Short Seller as a villain in 2008 Economic distress which was not the case and Politician as hero as they were trying to kick out Short seller from the market.