Five years after Wirecard, the EU continues to discourage market whistleblowers

This week marks the fifth anniversary of Wirecard’s collapse, following the company’s stunning announcement in June 2020 that 1.9 billion euros had gone “missing.” However, one group was not shocked: short sellers. For years, they raised red flags about Wirecard’s meteoric rise, published sceptical research, questioned the company’s financials, and warned investors and regulators alike. Wirecard’s share price plummeted once the scale of the fraud became undeniable, erasing billions from investor portfolios across Europe and around the world.

Short sellers played a crucial role in exposing the misconduct, so one might conclude Europe welcomes them with open arms. Yet five years after the scandal, the continent continues to maintain barriers that keep these investors out. This is a missed opportunity, especially since the benefits of short selling have been proven time and again. Wirecard and Enron are dramatic examples, but there are countless lower profile cases where short sellers uncovered wrongdoing, challenged flawed narratives, helped deflate overvalued share prices, and provided essential liquidity that facilitated stable and well-functioning markets.

Despite prioritising capital market improvements through the Savings Investments Union, the EU has yet to update its short selling rules that hold back investment in Europe. Greater capital market integration cannot be achieved without policies that encourage corporate transparency, a diversity of views, effective markets oversight, and robust trading. Short sellers contribute to all four.

They do so by providing early warning of unsustainable business models, inflated valuations and, in Wirecard’s case, outright fraud. Their work benefits investors, improves price discovery, and helps ensure that capital flows to its most productive uses. Also, it is well understood that markets function better when there is ample liquidity. Short sellers contribute to liquidity by continuously selling borrowed shares and later buying them back, increasing trading volume on both sides of the market.

The EU introduced its problematic short selling regulation (SSR) after the 2008 financial crisis. The rules have not been meaningfully updated in more than a decade despite repeated calls for targeted enhancements – and despite the EU’s stated goals of simplification and greater international competitiveness.

The regulation requires the identity of market participants to be disclosed publicly if they hold short positions above a threshold of 0.5 percent of shares outstanding. This level of detail is not useful to legitimate investors, but exposes short sellers to public threats and harassment and allows “copycat” trades of deeply researched investment strategies.

As a result, many investors only take out de minimis short positions that don’t have to be revealed publicly, or they write off the strategy completely. This distorts market functioning, increases volatility, and supresses useful market signals. Even worse, it makes it much harder to catch the next Wirecard.

The SSR also empowers national authorities to prohibit short selling during periods of market stress. But recent evidence, including a study by ESMA on COVID-era bans, found that these restrictions can harm liquidity and price discovery, with effects that persist long after bans are lifted. Germany banned short selling of Wirecard shares in February 2019, likely delaying justified price corrections and shielding the company from scrutiny. This harmed investors who may have bought shares at all-time highs before the stock collapsed.

Practical reforms are within reach. The UK has already taken a more balanced approach, by legislating this year to introduce aggregated disclosures on an issuer-by-issuer basis. This model provides decision-useful information to investors and transparency to regulators without exposing individual positions or strategies. The EU should follow suit with three steps to modernise its approach. First, it should replace individual public disclosures with aggregated disclosures at the issuer level. Second, it should establish a single EU-wide reporting portal instead of the 27 national systems that exist today. Third, it should require national authorities to clearly justify and explain proposed bans.

These enhancements would align short selling rules with the EU’s broader goals of creating sturdier and more integrated capital markets by increasing competitiveness, reducing compliance costs, improving transparency, and giving investors better tools to manage risk. Most importantly, they would ensure that dissenting voices—like those who shorted Wirecard—are heard.

Revamping its short selling rules must be part of the agenda as the EU seeks to leverage the power of capital markets to their full effect. Five years after Wirecard, it remains clear: stronger, more resilient markets depend on healthy scepticism and policies that enable it to thrive.

Bryan Corbett has been President and CEO of the Managed Funds Association (MFA) since 2020. MFA represents global alternative asset managers, including hedge funds, private credit funds, and other types of alternative investment strategies. The association is headquartered in Washington, D.C., but has also maintained a presence in Brussels since 2022.