A Study on the Impact of Short Selling Mechanisms on Investor Protection-A Case Study of CITIC Securities_Vol. 3 No. 3 (JEL 2026)_Journal of Economics and Law (ISSN: 3005-5768)

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A Study on the Impact of Short Selling Mechanisms on Investor Protection-A Case Study of CITIC Securities

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DOI: https://doi.org/10.62517/jel.202614310

Author(s)

Xinyi Wang

Affiliation(s)

School of Law, Nanjing Audit University, Nanjing, Jiangsu, China

Abstract

As a core short-selling mechanism in capital markets, securities lending can strengthen oversight of listed companies' information disclosure, improve the quality of such disclosures, and protect investors; however, its effectiveness depends on sound legal and regulatory frameworks.Using the 2012 CITIC Securities "Massive Loss Scandal" as a case study, the analysis reveals that in a weak legal environment, the dissemination of false bearish information can trigger sharp declines in stock prices. The profits from short selling far exceeded the costs of penalties for violations under the Securities Law at that time, causing the short selling mechanism to deviate from its original purpose of price discovery and degenerate into a tool for profit-seeking by certain entities, thereby harming the interests of small and medium-sized investors.The new Securities Law, revised in 2019 and implemented in 2020, specifically addressed these institutional shortcomings [1]. The addition of a dedicated chapter on investor protection, the "opt-in, opt-out" class action mechanism, significantly increased fines for violations, and explicit requirements for fairness in information disclosure have substantially raised the cost of regulatory violations related to short selling and streamlined channels for rights protection.However, as evidenced by the 2021 Shandong "black mouth" syndicate manipulation case, the new law still has shortcomings regarding the determination of collusion among parties and the regulation of online information dissemination.Research indicates that short-selling mechanisms have a dual effect on investor protection; the realization of their value requires a sound legal framework, strict regulatory enforcement, and a robust investor rights protection system. Only by achieving synergistic alignment between short-selling transaction rules and investor protection laws can the short-selling mechanism truly serve the price discovery function of capital markets and the protection of investor interests.

Keywords

Short Selling Mechanisms; Investor Protection; Retail Investors; Legal Regulation

References

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