SEC Temporarily Bans Short-Selling Stock of 799 Financial Companies
Lending credence to concerns that short-selling may have contributed to the sudden downslide of several major names on Wall Street during recent market turmoil, the U.S. Securities and Exchange Commission has temporarily banned the practice concerning shares of 799 financial institutions.
“The SEC said today that it will halt short-selling of U.S. banks, insurance companies and securities firms through Oct. 2, while the Financial Services Authority in the U.K. banned short sales of financial shares for the rest of the year,” reports Bloomberg.
However, the Wall Street Journal (sub. req.) says the temporary ban on short sales is for 10 days, but could be extended after that for up to 30 days.
Short-selling involves investors who essentially bet that the share price of a particular company will fall. Instead of buying the stock outright, the investor “borrows” a certain number of shares from his or her stockbroker. The broker sells shares that belong to the brokerage or another client, crediting the proceeds to the investor’s account, explains a detailed Investopedia article on the practice.
Sooner or later, of course, the investor has to “cover” the short position and reimburse the broker for the borrowed stock. The investor does so by purchasing the same amount of shares in the same company on the open market and returning them to the broker, the article continues. If the shares have decreased in price, as the investor expected, he or she profits. If they have gone up in value, the investor loses.
“Not all short-selling is alike. On Wednesday, the SEC adopted rules it said would provide permanent protections against abusive instances of ‘naked’ short-selling, in which sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale,” reports a Business Week article on the SEC’s short-selling ban. “Those new rules took effect Thursday, shortening the required time for short-sellers to deliver the stocks underlying their transactions.”
Stock markets worldwide are soaring, as a result of the short-selling ban and a plan unveiled late yesterday by U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke to purchase problem mortgages from banks, reports Bloomberg in another article.
Additional coverage:
ABAJournal.com: “Did a Short-Selling Conspiracy Spark the Stock Market Debacle?”
Reuters: “FACTBOX: US SEC short-selling rules issued this week”
Securities & Exchange Commission (press release): “SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets”
Bloomberg: “Paulson, Bernanke Push Plan to Cleanse Balance Sheets “
Updated at 11:50 a.m. to include additional Bloomberg coverage on soaring stock market and Bernanke-Paulson plan.
