Short-Sale Ban Ends to Poor Reviews

Wall Street Journal ^ | October 9, 2008 | Kara Scannell and Craig Karmin

[reaganaut1]

The Securities and Exchange Commission's ban on short selling, which sparked a series of similar bans around the globe, was intended to be a "time out" and "restore equilibrium to markets." By the time it expired Wednesday night, the general view was that it added to market confusion and didn't do much to halt the slide in financial stocks.

"I think what we did was we gave these stocks an artificial boost for a while, but it was pretty short-lived," said Charles Jones, a professor at Columbia Business School. "It was just like a glass of orange juice, and then we had the sugar crash a couple hours later."

The ban applied to nearly 1,000 stocks, most of them financial institutions. Between the ban's introduction on Sept. 19 and Wednesday, the Dow Jones Industrial Average fell nearly 19%. An exchange-traded fund tracking financial companies, the Financial Select Sector SPDR Fund, was down nearly 26%.

Mr. Jones said that comparing financial stocks with the overall market suggests there was an "initial bump" for the stocks covered by the ban, but gradually that group "has been giving it all back."

Arturo Bris, a finance professor at IMD, a business school based in Switzerland, said he is conducting a study of the ban's impact on the markets. Early evidence shows "the ban was counterproductive," he said, and by "not allowing shorting, the market has dropped even more. Short sellers act as a cushion." In falling markets, short sellers often step in as buyers to cover their positions.

[reaganaut1]

They could have reinstated the uptick rule, and disclosure of short positions to the SEC may be a good thing, but a blanket ban on selling short particular stocks was ridiculous. It's no wonder that it did not work.

[rabscuttle385]

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[stocksthatgoup]

The Short Selling ban was a self defeating loser to begin with. Many short sales are not speculative but rather defensive. (Short against the box - Where you sell short positions that you hold in your portfolio, thus taking a non position.) Later you hope to buy back the shares because you intended to hold your original stocks for the long term.

Removing this option put money managers in a place where they had to sell shares outright or ride the market down. Making it less likely that they would reinvest or cover their short position at a later date.

[tcostell]

They could have reinstated the uptick rule, and disclosure of short positions to the SEC may be a good thing.

Every study I've ever seen of the uptick rule was that it was totally innefective. As for disclosure, it would provide a disadvantage to large institutions which are responsible for managing most of the retirement money in the country.

It's a bad idea. Better to let the free market be free.

[TenthAmendmentChampion]

Yes, reinstate the uptick rule.

[mysterio]

They should pass a law that stock prices can only go up. That'll solve'er!

Government is the answer! Capitalism is dead, long live "capitalism."

[sheana]

Arturo Bris, a finance professor at IMD, a business school based in Switzerland, said he is conducting a study of the ban’s impact on the markets. Early evidence shows “the ban was counterproductive,” he said, and by “not allowing shorting, the market has dropped even more. Short sellers act as a cushion.” In falling markets, short sellers often step in as buyers to cover their positions.

That man gets it. Shorts provide liquidity to the market plus if they had left the shorts alone the market wouldn’t have tanked like it did.