Due to the ongoing turmoil in the financial markets a short-selling ban is being considered (again, one has to say, but this time in Europe):

Aside from the point that this seems to serve purely political reasons (since it is pretty clear that short-selling is not the culprit, quite the opposite as a ban will most probably lead to even more market volatility) I have a different question:

Concerning the experience with past bans: How was the derivatives markets affected esp. futures and options? There will be studies out there, I hope. This is also interesting with respect to the question how important hedging with linear instruments really is for market makers.

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    $\begingroup$ I'm willing to give you the benefit of the doubt because of your reputation, but isn't the question as stated rather subjective? Wouldn't it be better to ask how the ban affected derivatives markets in '08, rather than speculating on an unknown future? $\endgroup$ – Tal Fishman Aug 11 '11 at 21:06
  • $\begingroup$ I agree with @sheegaon. This question is likely to generate debate and speculation rather than "facts, references, or specific expertise". Perhaps you can re-phrase to encourage answers that focus on the models, event-studies, etc. that investigate effects of short-selling bans? $\endgroup$ – Joshua Ulrich Aug 11 '11 at 21:31

In 2008, the SEC instituted an exemption for market makers to allow them to sell short for the purposes of bona fide activities related to market making in options. However, "for new positions, a market maker may not sell short if the market maker knows a customer or counterparty is increasing an economic net short position".

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    $\begingroup$ This should be a comment, it doesn't even try to answer the question. $\endgroup$ – Tal Fishman Aug 12 '11 at 1:48
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    $\begingroup$ "with respect to the question how important hedging with linear instruments really is for market makers." This was the part I was trying to address - the short selling bans had little impact on the ability of market makers to hedge. By all means add it as a comment if you feel it better belongs there. $\endgroup$ – I-CJW Aug 12 '11 at 10:04

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