Short-Sellers: Unfairly Targeted in the Market Crisis? - BusinessWeek
During the nearly three-week ban on shorting financial shares, the market sank 21.5%. Are regulators after the wrong parties?
by the agency of David Bogoslaw
As the panicked selling in equities markets around the world has accelerated over the past brace weeks, in that place bring forth been several attempts to slow the process, including the temporary suspension of trading on stock exchanges from Moscow to Milan. In the U.S., the Securities & Exchange Commission banned short-selling—bets that shares of certain companies would trip—without interruption a list of greater degree of than 800 financial funds whose balance sheets esteem exposure to risky mortgage-backed securities and other distressed products.
When the ban, that lasted 13 commercial days, was lifted on Oct. 9, it signaled a go to business as usual for the financial sector. Shares of Morgan Stanley (MS), one of the last-standing investment banks, which recently became a bank holding company subject to tighter powers that be regulation, sold opposite with a avengement, finishing all but 26% take down on Oct. 9 and dropping an additional 24% on Oct. 10. Insurance stocks such as Prudential Financial (PRU) and Hartford Financial Services Group (HIG) were also among the biggest losers on Oct. 9.
Whether the ban had the intended effect remains open to debate, given the 21.5% globule in the Standard & Poor’s 500-stock index from the market close on Sept. 19, before the ban took effect, through its last day, Oct. 8. And the nearly 33% cast one’s self for the period of the same period in the KBW Bank Index (BKX), which has a much closer correlation with the 800 names traders were prohibited from shorting, is enough to make one think regulators were afflicting to pin blame for the extended sell-off in monetary stocks in succession the wrong people.
Cover for the SEC?Some market strategists think the anathema was nothing but political invest for the SEC to show it was paying attention. In reality, the regulator has been behind the curve in reining in dubious financial reporting practices by the agency of the major financial institutions, what one. helped call into existence the current crisis. By preventing short-selling for two and a half weeks, the SEC disrupted "a legitimate way for investors to convey information to the mart" about the pricing of stocks, says Gerald Buetow, managing boss of Portfolio Management Consultants, the investment arm of Envestnet . If anything, the denunciation on selling sententious seems to have exacerbated mart volatility by depressing trades in the options market and forcing investors who couldn’t hedge their long stock positions to take offsetting options to vend their public securities.
The market-makers who provide much of the liquidness in the options market curtailed their selling of options on financial stocks during the put under ban because they couldn’t cover themselves by selling short, says Peter Bottini, executive vice-president for trading at optionsXpress (OXPS) in Chicago. He thought they would jump right upper part in after the ban ended, excepting that hasn’t occurred. That’s in all probability because the key liquidness providers tend to be the options desks at the larger banks, whose shortage of cash isn’t allowing them to play that role right now. That’s one driver, he believes, of the unprecedented volatility in the equities emporium at the end of this week. The Chicago Board Options Exchange Volatility Index (VIX) soared 20%, to a record-high 76.94 on Oct. 10 in the van of sliding back to close just under 70.
For those who are determined to drive down the reward of a stock, there are far more energetic and less costly ways to do so than by selling short, says Buetow at Portfolio Management Consultants.
