Investment intelligence. Re-defined

More investment strategies coverage. More access to investment insiders and gurus. More info to make more informed decisions.

»

Academics slam short-selling ban

By Jeff Benjamin

December 22, 2008 3:10 pm ET

The Securities and Exchange Commission’s temporary ban on short selling for nearly 1,000 financial-sector stocks was counterproductive, ill-conceived and politically motivated, according to a research report from Columbia University in New York released last week.

Advertisment



“Virtually every piece of empirical evidence in every journal article ever published in finance concludes that without short-sellers, prices are wrong,” wrote Charles Jones, professor of finance and economics and chair of the finance and economics division at Columbia.

He worked with researchers at Texas A&M University of College Station and Cornell University of Ithaca, N.Y. to study the impact of the SEC-imposed ban on short-selling period from Sept. 15 through Oct. 8.

The ban was lifted after President Bush signed a $700 billion bailout package into law.

According to the research, on the first trading day following the introduction of the ban, stocks subject to the ban rose by an average of 10.9%, while the rest of the market rose by 4.5%.

Over the full three weeks of the ban period, however, financial-sector stocks fell slightly more than the 30% decline set by the overall market.

Even more troubling, according to the research, was the ban’s effect on market liquidity.

“Stocks subject to the ban suffered a severe degradation in liquidity as measured by bid-ask spreads,” according to Mr. Jones.

Prior to the ban, the average bid-ask spread of 1,066 control group stocks traded on the New York Stock Exchange was 0.25% basis points.

During the ban period, the spread for the control group swelled to 45 basis points, but the spread of financial-sector stocks subject to the short-selling ban swelled to 0.92%.

“Regulators yielded to politicians’ impulse to find a scapegoat,” he said.

“What was the SEC thinking? One possible answer is that it was not.”

Comments