Tag: financial stocks

SEC bans short selling in 800 financial stocks

Capitalism gets a bridle:

Given the importance of confidence in financial markets, the SEC’s action halts short selling in 799 financial institutions. The SEC’s emergency order, pursuant to its authority in Section 12(k)(2) of the Securities Exchange Act of 1934, will be immediately effective and will terminate at 11:59 p.m. ET on Oct. 2, 2008. The Commission may extend the order beyond 10 business days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.

The SEC could have said “In order to maintain the value of investment bankers’ bonuses, we are now cutting the investing public out of the game.” And if you are a short-biased fund, you just got “bricked.” The real joke of this is that it’s being done under the guise of “restoring liquidity” to issues. All it’s really doing is giving insiders some breathing room for bailing out.

The “No Loss Sale Rule” is next.

Did the short selling ban work?

The Wall Street Journal found it depends on who you talk to:

Floyd Norris, in his Marketplace column, noted that the 12 pure U.S. stocks rose 23% after July 15; the S&P 500’s financials rose 22% in the same period.

Still, S3 Matching Technologies, an Austin, Texas, data firm, points out that Fannie Mae’s stock fell 40% and Freddie Mac 41%. Those two stocks, you will remember, provided much of the catalyst for the emergency order.

But academic and corporate research indicate the experiment failed. Perhaps the strongest antiban argument comes from Arturo Bris, a professor at Swiss business school IMD who is affiliated with the Yale International Center for Finance. He tracked the 19 stocks protected by the SEC’s Emergency Order and examined short-selling data provided by the NYSE…

Bris’s most damning finding was that the emergency order impeded market efficiency–in effect, it distorted the “price discovery” process that it was hoping to fix. “The G19 stocks have suffered a significant reduction in intra-day return volatility and an increase in spreads, which suggests a deterioration of market quality,” Bris wrote.

In addition, some unprotected financial stocks–including Washington Mutual–were hit really hard. Bris told Deal Journal of the ban: “I think it targeted the wrong stocks.”

And for those with short-term (no pun intended) memory loss, the purportedly right stocks.

No shorting and no losing

Forget waiting for “fail to deliver” notices on the short selling of financial issues – some firms are refusing the shorts altogether. It’s a classic case of “you pat my back and I’ll pat yours.”

It’s high time the SEC implements the “No-Loss Sale Rule” instead…

(h/t Big Picture)

Save a trader from a coronary today!

Have the Financials Bottomed?

Barry Ritholtz asks the question.

The short selling stop-gap may have reduced the wild gyrations, but if banks are in such bad straights over the housing debacle that they are incapable of even lending to profitable businesses, then I suspect we are now going to see death from a trillion cuts.

In Defense of Speculators

Motivated by the clampdown on short selling of financial stocks, the Wall Street Journal says

That is one takeaway from Washington’s recent response to market turmoil. By singling out “speculators” who want to push bank stocks down and oil prices up, lawmakers and policy makers reinforce a message that the free market is a wonderful thing as long as it isn’t going against you.

From the list, you could also surmise the SEC is trying to keep last year’s stock bonuses above water, for its buddies of course.

UPDATE: Yet the WSJ contradicts itself a little while later, lobbying for return of the uptick rule. The argument cries out “Save my retirement account from those evil short-sellers.”

Nobody was whining when the financials were reporting billions upon billions in fresh new earnings during the mortgage boom. Now that those financials are writing off the same billions and their stocks are reflecting that fact, deflecting blame is the obvious reaction.