When stock prices plummet in a market rout, short sellers often become a target. Regulators can attempt to curtail the plunge by restricting equity short selling, or betting with borrowed shares. Shorts, as these bettors are known, say their trading helps keep markets functioning smoothly. Critics say their actions can blur into market manipulation. During periods of acute market distress, such as now in the face of the coronavirus pandemic, some of the hardest-hit countries are again imposing bans.

1. How does short selling work?

Short sellers borrow shares and sell them, hoping to buy them back at a lower price to profit from the difference. But getting the timing right is crucial. If the stock price rises, they could lose money instead.

2. Who are the short sellers?

Most shorting is done by hedge funds and institutional investors to cushion their investments or to bet that shares have risen too high. There are also so-called activist shorts, who research companies to find targets that they allege have dodgy business or accounting practices, spread the word (sometimes anonymously) and, if all goes as planned, watch the stock slump. Many authorities dislike short selling. The former head of the New York Stock Exchange has described the practice as “icky and un-American.”

3. How is short selling being restricted?

France’s AMF regulator halted such trades in 92 stocks for a day on March 17, while Italy’s Consob blocked the transactions in shares of 20 companies and Belgium’s FSMA imposed a similar restriction. Spain went further, telling market participants they couldn’t bet on share declines for a month. Madrid, as well as Italy, had already ordered a one-day ban on short selling in the March 13 sessions. South Korea has banned short-selling of shares in the benchmark Kospi index, tech-heavy Kosdaq index and small-cap Konex from March 16 to Sept. 15. China’s securities regulator in February suspended securities lending, one of the few short selling tools available in China, until further notice, according to people familiar with the situation. The European Union’s market regulator has ordered hedge funds and other traders to disclose more information when they bet that stocks will decline and signaled that more restrictions could come.

4. Has this ever happened before?

Oh yes. The U.S. targeted short selling during the Great Depression and joined the likes of the U.K., Germany and Japan in limiting short selling or banning it in 2008 during the global financial crisis. China’s regulator blamed “malicious” short selling in part for a stock market crash in 2015, placing limits on the practice as well as arresting traders.

5. Is short selling illegal?

It’s legal in most major stock markets, though some may issue temporary restrictions during periods of market turmoil. It was already under attack before the stock market started tanking in February. French politicians prepared a report last year on ways to rein in short sellers and activist investors, and German authorities began an investigation into speculators who criticized the accounting of payments company Wirecard AG. What is banned either partially or fully in several markets is so-called naked short selling -- betting on a stock’s decline without having first borrowed the shares.

--With assistance from Ravil Shirodkar, Macarena Munoz, Benjamin Robertson, Albertina Torsoli and Phil Serafino.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Laurence Arnold

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