Short Sale Constraints and Market Efficiency in Securities Litigation

Wed Apr 24 16:24:38 EDT 2013
By Stefan Boettrich

The efficiency of the market in which a security trades is often a crucial component of class certification in securities litigation. In such cases, market efficiency analysis by the courts is often centered on analysis of the Cammer factors. In this NERA paper, Consultant Stefan Boettrich focuses on one specific Cammer factor, the existence of market makers and arbitrageurs in the market. In particular, an important issue to be addressed is whether traders are able to complete short sale transactions and thus fully participate in the market. A short sale enables a trader to take a negative position in a security, and is a crucial mechanism by which negative information can be rapidly reflected in market prices, but may be hindered by various constraints. Therefore, Mr. Boettrich points out, indicators of constraints to short sales are valuable in evaluating claims of market efficiency.