Concerns about how short sellers carry out attacks have arisen repeatedly over the years.
The Securities and Exchange Commission and Justice Department have gone after hedge funds for running “short and distort” campaigns. The practice typically involves setting up bearish bets, then releasing misleading or inaccurate information about a company to drive down the price before closing out the position for a profit.
But there are also concerns about the impact that earnest research can have when it’s sprung by surprise on the market.
Studies by Columbia University law professor Joshua Mitts have found that short sellers’ reports can briefly induce bouts of panic selling before shares rebound. In those jittery moments—sometimes mere minutes or hours—well-positioned short sellers can cash out of trades and pocket significant gains.
Mitts examined more than 1,700 reports made by pseudonymous short sellers from 2010 to 2017, concluding that they contributed to more than $20 billion in dislocated values or temporarily mispriced stocks.
Academics have been encouraging U.S. authorities to address the possibility that short sellers are laying out their cases against stocks, then using the impact of that news to quickly reap gains and quietly move on.
Early last year, Mitts and about a dozen other prominent securities-law professors urged the SEC to write rules requiring that short sellers who voluntarily reveal bets against a stock be required to disclose when they’ve exited the position. The professors also asked the regulator to write a new rule that would make closing a short position immediately after disseminating a negative report—with an intent to do so upon publication—constitute market manipulation.
—With assistance from Daniel Taub.
This article was provided by Bloomberg News.