Regulating Short Selling. The European Framework(s) and the Regulatory Arbitrages

Opponents of short-selling argue it is a trading activity driving asset prices under their fair values. This is the rationale of many recent market regulations that introduced additional restrictions, disclosure and even complete bans on short-selling to restrain the pressure on prices. On the other hand, there is a theoretical literature describing the advantage of short-sellers, since they are expected to accelerate the alignment process of asset prices with their fundamental value. We examine and compare the European regulatory interventions after the 2007 financial crisis in order to find out their effectiveness and dissimilarities, showing how they affected financial agents decisions and market microstructure features. We demonstrate that big players, who operate in many countries, can arbitrage regulatory asymmetries, un-levelling the playing field.