Short-selling ban lifted, managers rejoice

A temporary ban on short selling the stock of more than 800 banks and related financial companies expired at midnight, much to the satisfaction of the hedge fund industry.
OCT 09, 2008
A temporary ban on short selling the stock of more than 800 banks and related financial companies expired at midnight, much to the satisfaction of the hedge fund industry. “We believe that lifting the ban will help bring liquidity back into the markets, stabilize the price discovery function and breathe new life back into the convertible securities markets, which have been frozen,” said Richard Baker, president and chief executive of the Managed Funds Association in Washington. Short selling involves borrowing a stock to sell, and then repurchasing it at a lower price for a net profit, assuming the stock price declines. The ban was imposed by the Securities and Exchange Commission on Sept. 18 in an effort to take some downward pressure off the financial sector stocks that were considered most vulnerable in the current credit crisis. The ban was originally designed to expire on Oct. 2, but was extended at least three business days beyond the passage of the $700 billion government bailout package, which was passed on Friday. While it is difficult to determine what impact short-selling would have had on the markets in general, and the financial sector in particular, it is clear that the equity markets have been declining on a steady clip throughout the duration of the ban. The Standard & Poor’s 500 stock index declined by 17.8% during the short-selling ban, while the average decline of those firms protected from short selling fell by 12.8%. The $2 trillion hedge fund industry is most often associated with short-selling strategies, although the strategy is used by a range of institutional money managers, mutual funds and even individual investors. When the stock market experienced one-day declines in the 500- and 700-point range during the ban period, some hedge fund managers cited the volatility as evidence that the short-selling ban was not the answer. Mr. Baker commended the SEC’s decision to let the ban expire, and added that “this should assist businesses in raising capital, restore investor confidence and help to set a course for economic recovery.” At 2:30 p.m. ET the Dow Jones Industrial Average was down 150.69 points. Wednesday’s 189-point drop extended the Dow's longest losing streak since the six-day drop that ended April 16, 2007.

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