Executive Summary
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This article examines the role of short sellers in the marketplace. Short selling involves three major participant groups: Lenders, agent intermediaries, and borrowers.
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First, the history of short selling is discussed. This includes the enactment of the Securities Exchange Act of 1934, the adoption of the uptick rule in 1937, and the relaxation of that rule in 2007.
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Next, the short-sale process is described. Five categories of short position are identified: General collateral, reduced rebate, reduced rebate and fail, fail only, and buy-in.
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Third, the borrowers are identified and their activities discussed. They include hedge funds, mutual funds, exchange-traded fund (ETF) counterparties, and option market-makers.
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Fourth, the lenders are identified and their motivations for lending are discussed. The primary lenders include mutual funds and pension funds.
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Fifth, historical statistics on the universe of lendable securities and the percentage of loaned equities are presented. A dramatic increase in the level of loaned securities is observed.
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Finally, the academic literature on short selling is briefly reviewed.
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