Yes. A short sale has to be accepted by the seller and then approved by their lender(s). The lender(s) will have a Brokers Price Opinion or Appraisal done on the property to determine current market value before approving the short sale. The current market value may or may not be the list price and or your offer price. If the lender(s) determines the current market value is higher than the offered price, they will ask for an adjustment to the offer price. At that point, you can agree or walk away.
It is not only legal for the bank to demand a higher price, but they would be remiss in their duties if they didn't depending on how close to market value your original offer was. That's just how it's done.