Which Countries Have Made Short Selling Illegal?

In financial markets, short selling is a strategy where investors sell borrowed securities with the expectation of repurchasing them later at a lower price. This practice allows market participants to potentially profit from a decline in an asset’s value. While widely accepted, its legality varies across jurisdictions. Some countries permit short selling with regulations, while others restrict or prohibit it, reflecting diverse views on its role in market stability.

Understanding Short Selling

Short selling is a trading strategy where an investor borrows shares of a stock and immediately sells them on the open market. The goal is for the price to decline, allowing the investor to buy back the same number of shares at a lower price. These repurchased shares are then returned to the lender, and the difference, minus fees, represents the short seller’s profit.

For example, if an investor believes a stock trading at $50 is overvalued, they might borrow and sell 100 shares. If the price falls to $40, they can buy back those shares for $4,000, return them, and profit $1,000 before fees. This strategy carries unlimited potential loss if the stock price rises indefinitely, forcing the short seller to buy back shares at an increasingly higher price.

Countries with Permanent Restrictions

Some countries have implemented permanent restrictions or outright bans on certain forms of short selling, often reflecting a cautious approach to market stability. South Korea has a history of imposing bans on short selling, with a significant ban extended until at least March 30, 2025, following investigations into naked short selling practices by institutional investors. This measure was part of a broader effort to address concerns about market manipulation and maintain confidence.

Malaysia adopted a cautious stance on short selling after the 1997-1998 Asian financial crisis, implementing a ban that, while later lifted, saw restrictions reintroduced during subsequent market downturns. In the European Union, a comprehensive regulatory framework governs short selling to enhance transparency and reduce risks. The EU Regulation on Short Selling mandates that all short sales of shares must be “covered,” effectively banning naked short selling. This means that sellers must first borrow or arrange to borrow shares before selling them. Germany, for example, made a ban on naked short sales of certain euro-denominated government bonds, credit default swaps based on those bonds, and shares in its ten leading financial institutions permanent in 2010.

Japan’s Financial Services Agency also took steps to permanently restrict naked short selling. After initially implementing a temporary ban in October 2008, it extended this prohibition multiple times before making it permanent five years later. These permanent measures highlight a global trend among regulators to curb practices perceived as excessively risky or destabilizing, reflecting each nation’s economic context and regulatory philosophy.

Countries with Temporary Restrictions

Temporary restrictions on short selling are often enacted during periods of significant market stress, such as financial crises or extreme volatility, to prevent further price declines and stabilize markets. During the 2008 global financial crisis, several countries, including the United States, the United Kingdom, Australia, and Canada, temporarily banned or restricted short selling, particularly in financial stocks. The U.S. Securities and Exchange Commission (SEC) issued emergency orders in September 2008, prohibiting short selling in a wide array of financial stocks, believing that aggressive short selling contributed to sudden price declines unrelated to true valuations.

The COVID-19 pandemic in 2020 triggered another wave of temporary short selling bans across various jurisdictions as markets experienced unprecedented volatility. European countries like Italy, Spain, France, Belgium, Austria, and Greece implemented such measures, often coordinating through the European Securities and Markets Authority (ESMA). These bans were typically broad, covering shares on main indices and trading venues, and were generally intended to be short-term emergency responses. For instance, Italy initially imposed a one-day ban in March 2020, followed by a three-month prohibition on increasing net short positions in listed shares.

Similarly, Spain’s securities regulator banned short sales for a month, which was later extended, covering transactions on shares and indices, including derivatives. South Korea also imposed a pandemic-related ban on short selling in March 2020, which was extended multiple times, becoming one of the world’s longest such restrictions. These temporary interventions, while aimed at restoring market confidence and stability, often led to debates about their effectiveness and potential impact on market liquidity and price discovery.

Types of Short Selling Restrictions

Countries employ various mechanisms to restrict short selling, aiming to mitigate potential market disruption without necessarily imposing outright bans. One common approach is the prohibition of “naked short selling,” where a trader sells shares without first borrowing them or confirming their availability. Many jurisdictions, including the United States under Regulation SHO and the European Union, have banned or heavily restricted this practice to prevent failures to deliver securities and curb manipulative activities. This ensures that short sales are “covered,” meaning the seller has located the shares to be borrowed.

Another type of restriction involves “uptick rules” or “alternative uptick rules,” which dictate the price at which a short sale can be executed. The U.S. SEC’s original Uptick Rule, implemented in 1938, required short sales to be conducted at a price higher than the previous trade, preventing short sellers from accelerating a stock’s downward momentum. While the original rule was eliminated in 2007, an alternative rule (Rule 201) was approved in 2010, allowing short selling only if the price is above the current best bid when a stock’s price has fallen by at least 10% in one day.

Disclosure requirements represent a transparency-focused restriction, mandating that significant short positions be reported to regulators or publicly disclosed. In the European Union, significant net short positions in shares must be reported to competent authorities and, beyond a certain threshold, disclosed to the public. The U.S. SEC also recently adopted new rules requiring certain investment managers to report detailed information about their short positions via Form SHO, although this data is aggregated and then published by the SEC. Such rules aim to provide greater insight into short selling activity and prevent market manipulation.

Finally, some restrictions target specific securities or sectors, often implemented during crises or for particular market segments. This can involve banning short selling only for financial stocks, as seen during the 2008 crisis in many countries, or for specific companies suspected of market manipulation. These targeted restrictions allow regulators to address perceived vulnerabilities without imposing a blanket ban. The intent is to preserve investor confidence, ensure market stability, and promote efficient price discovery while preventing abusive practices.