Executive Summary
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This article examines the role of short-sellers in the marketplace. The process of short-selling involves three major participant groups: the lenders, the agent intermediaries, and the borrowers.
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First, the history of short-selling is discussed briefly. This includes the enactment of the Securities Exchange Act of 1934, the adoption of the uptick rule following concentrated short-selling in 1937, and the relaxation of that rule in 2007.
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Next, the short-sale process is discussed. Five categories of short positions are identified. These categories include 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 are discussed. These borrowers include hedge funds, mutual funds, 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 for the period 2006 to the second quarter of 2008 followed by significant declines in the third and fourth quarters of 2008. Since then, the level of loaned securities has gradually increased by 12%.
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Finally a brief review of the academic literature on short-selling is conducted.
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