SHORT SELLING

 Short selling is a trading strategy that bets on a decline in the share price 

Either traders borrow shares for shorting or use the derivatives market, which allows shorting without having underlying security. 

A ban on short selling should be used only in extreme situations , as it often distorts the the process of fair price discovery . It provides only short term relief and cannot alter the direction of the market. 

Instead of blanket ban on short selling, sebi might ban naked shorting in derivatives segment, means it will allow investors to go short only to hedge their cash positions 

A similar move is in for overseas investors taking the participatory notes route 

Algorithm trading & high frequency traders ( HFT) , whose influence in the domestic market increased exponentially  short-selling  is, selling shares of a company without really owning them. Short-sellers believe that prices will drop in future, hence they sell at a high price today and cover it by purchasing the same number of shares at a lower price on a later date. 

Investors who are of the opinion that the price of an asset is going to increase over time,are said to have a bullish perspective. Such investors would acquire the asset and in market parlance would have assumed a long position.

An investor with a bearish perspective would be of the opinion that the price of an asset is likely to decline. To operationalise his viewpoint he would sell an asset that he does not own. This can be done by borrowing an asset from a broker or a fellow investor and then selling it.

Since the asset is on loan,the borrower has to eventually reacquire the asset and return it to the party who extended the loan to facilitate the initial sale. Such a trading strategy is known as a ‘Short Sale’. The philosophy behind short selling is to ‘Sell High and Buy Low’ for the expectation of the short-seller is that prices would have declined by the time he covers his position. 

the broker who facilitates the short sale will not allow him free use of the sale proceeds. The proceeds will be retained by the broker as collateral.

the short-seller has to compensate the lender from his funds,if the asset were to make a payout during the period of the short-sale.

if the asset were to experience a corporate action such as a stock split or a bonus issue,the borrower of the securities needs to factor in the consequences while covering the position.large institutions can often persuade a broker to share some of the interest income with them. If the broker were to agree to do so,it would be termed as a ‘Short Interest Rebate’.

most economists would argue that short selling is a valuable activity—short sellers help enforce the law of one price, facilitate price discovery, and enhance liquidity. short sale restrictions may lead to overvaluation and bubbles, and reduce the ability of investors to hedge exposures 

Using daily international data on recent short-sale bans around the world, Beber and Pagano (2013) document that the short-sale bans implemented during the financial crisis of 2007-2009 led to reductions in market liquidity and slower price discovery. 

when looking at price effects, it is seen that the financial institutions, rather than regular firms, should be particularly affected by short sale bans.

the ability of short sellers to prey on financial institutions depends crucially on the condition

of the financial institution.

As a securities are on loan,the borrower cannot bestow the lender with voting rights . Such rights would obviously go to the party who acquired the shares from the short-seller. the sale leads to an inflow of funds,the broker,who as explained will retain the cash as collateral .