Different types of short selling
Produced in partnership with Orrick, Herrington & Sutcliffe (Europe) LLP
Different types of short selling

The following Financial Services guidance note Produced in partnership with Orrick, Herrington & Sutcliffe (Europe) LLP provides comprehensive and up to date legal information covering:

  • Different types of short selling
  • Short selling: the two key types
  • Covered short selling
  • Uncovered (naked) short selling
  • Naked short selling: settlement risk
  • Short selling in rights issues
  • Restrictions on short selling financials
  • The Short Selling Regulation

Short selling: the two key types

Regulation (EU) 236/2012 on short selling and certain aspects of credit default swaps came into force in the UK on 1 November 2012 and includes a definition of short selling in art 2.

Generally, short selling is understood to mean a technique whereby a trader arranges to sell a security that he does not own. The trader aims to make a profit from first short selling a security and, at some point in the future, buying it back at a lower price in order to return it to the original holder.

Short selling exists in the cash equities markets and there are also derivative equivalents to short selling. For example, a short position can be taken through index futures and options and spread bets. The FCA has issued the following factsheet on short selling.

In summary, there are two types of short selling:

  1. covered short selling–this is a practice whereby a short seller borrows shares from a shareholder in return for a fee so that they can be delivered to a buyer at settlement. The short seller thereafter short sells the shares to a buyer. At a point in the future, the short seller then purchases the equivalent number of shares in the market so that they can be returned to the original holder (closing