More On Short-Selling Of Stocks

This is some interesting stuff against the backdrop of recent actions by the SEC to curb short selling:

From the Financial Times:

“The cost of borrowing shares for short sales on Wall Street has been rising steeply in recent weeks, hampering the ability of hedge funds and other sophisticated traders to profit from market declines….

…The Securities and Exchange Commission on Tuesday revealed emergency action to clamp down on abusive short-selling, making it more difficult for traders to engage in so-called “naked” short sales of leading financial firms….

…However, the SEC clampdown, which takes effect on Monday, comes against the backdrop of sharply higher borrowing costs for shares – a development that has made it very difficult to short well-known names such as General Motors, traders say.

…“It has become much tougher as the number of funds that want access to stock has gone up,” says the head of prime brokerage at one Wall Street firm. “And stocks these days get hot much more quickly, which makes it even tougher.”…

…Generally, hedge funds borrow shares from money managers such as Fidelity or Barclays Global Investors to make short sales. But even as the demand for shares to borrow has grown, money managers are cutting the number of shares they lend for fear of depressing the market and of not having enough shares on hand to meet their own needs.

Hedge fund managers say they are worried about getting calls from brokers or money managers asking for their shares back, which could lead to a so-called “short squeeze” in which bearish investors have to buy stock to cover their short positions.”

IF it’s getting harder to short stocks, yet many stocks have plummeted just the same, doesn’t that seem to suggest that maybe, just maybe, these companies are victims of their own malaise and not short-sellers? It’s patently absurd that a sector that has spend the last year writing down 100s of billions in bad loans (and counting) is whining about short-sellers sending their stock prices down, as if they aren’t losing billions and struggling to raise cash in order to survive. Especially when you consider that many of the hedge funds that short stocks are run by the banks, it’s as if they’re saying: “while no one should be allowed to short us, we’re still going to go ahead and short everyone else”.

However none one should be surprised about any of this, because this situation is more about self-interest then fairness.

The SEC’s move to limit short-selling reminds me of the Marvel Comics “No Prize” of the 1980s, because it’s more of a reiteration of a requirement that’s already in place more than it is a truly new rule. Personally I believe that the market forces that are making it harder to short stocks will have more of an impact on short-selling then the SEC’s new “rule”. I wonder who the banks will blame their declining stock prices on after this new rule takes effect?

You can read more on this from the Financial Times here , and additional coverage from the Wall St. Journal here .

Subscribe by RSS Subscribe by Email