An introduction to short selling

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • An introduction to short selling
  • Who can short sell?
  • Market use of short selling
  • Role of short selling in the global financial crisis
  • Regulation of short selling in the EU and UK

An introduction to short selling

Short selling, or 'going short', is a technique whereby traders sell shares or debt instruments ('securities') which they do not own at the time of entering into the agreement to sell, in the hope that the price of the securities will fall, enabling the short seller to buy the shares back at a cheaper price than the sale price thereby making a profit. It is in the interests of short sellers for the price of securities to fall, and it is partly for this reason that the practice has been subject to regulatory restrictions since the global financial crisis of 2008.

The two principal methods of short selling are:

  1. covered short selling—this method of short selling occurs when the short seller borrows, or agrees to borrow, the number of securities that are being sold short from a holder of the securities. The holder in turn receives lending fees from the borrower, so that the holder can deliver them to a buyer at settlement

  2. uncovered (naked) short selling–this occurs where the short seller opts to short sell securities without first locating or borrowing them prior to arranging the short sell. Since the seller has not borrowed the shares that have been sold, the short seller does not have to pay any borrowing fees. Due to the risk that the naked

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