Professor Huasheng Gao: Short selling is a safety vent that helps ease market pressure

Release time：2020-06-16    

On May 19, 2020, in the second lecture of the series Watch Movies, Learn Finance of the Fudan Finance Open Course, Huasheng Gao, Deputy Dean for Faculty and Research at FISF, Executive Editor of the Fudan Financial Review, and Professor of Finance, offered his economic interpretation of the movie The Big Short. The course, streamed live on numerous platforms, such as: Sina Finance Channel, Sina Finance APP, Toutiao Finance Channel, Phoenix Finance, etc., attracted nearly 1 million simultaneous viewers.

Based on the bestseller nonfiction book The Big Short: Inside the Doomsday Machine by Michael Lewis, the movie sheds light on the 2008 global financial crisis and follows a few savvy Wall Street traders as they see through the housing bubble illusion before anyone else, and reap huge profits by shorting the subprime CDS.

Through his thorough analysis of the movie, Professor Gao talked about the ins and outs of the short selling mechanism. He pointed out that short selling is considered somewhat counterintuitive: it is basically the reverse of establishing a long position, and investors bet on falling asset prices. In reality, short selling agencies often obtain negative corporate news by any means necessary, which is what earns them a bad reputation. Although people usually associate short selling with a “malicious” activity, in fact it does not deserve this negative connotation.

“Short sellers are not the stock market’s black hats but investigators who help strengthen the market. Shorting is like a safety vent that helps to ease market pressure in the right moment.” Professor Huasheng Gao pointed out that prohibiting short selling only slows down the release of negative news, which might lead to direct consequences. As a matter of fact, shorting is of great significance because it mitigates price bubbles, facilitates hedging and other risk management activities, increases market liquidity, and ensures market efficiency. In terms of corporate governance, the existence of short selling discourages companies from engaging in any fraudulent or deceptive practices.

With the gradual development of the capital markets, the shorting mechanism has been gradually accepted by an ever-increasing number of markets. As an illustration, Professor Gao discussed the so-called Regulation SHO-pilot Program−a two-year natural experiment conducted by the U.S. Securities and Exchange Commission (SEC), which was designed to analyze the effectiveness of shorting rules in a controlled environment. The experiment proved that short selling added positive value to the market. On a final note, Professor Gao added that the method applied by the Commission was a good example that could guide policy makers around the world to better formulate and implement financial policies.