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Sec considering banning (temporarily) all short selling

September 19th, 2008 · No Comments

You might remember that in the beginning of all the present troubles we wrote an article titled “Silver lining?” We could not have thought that the lining would be this silver…

Three new rules against naked short-selling already introduced immediately, one under way (disclosure of short positions on a daily basis), a near certainty that there will come a bail-out fund for financial institutions to rid them of bad/illiquid financial instruments, and now the following;

SEC Plans to Temporarily Ban Short-Selling

  • WASHINGTON — The Securities and Exchange Commission took its most aggressive assault against bearish stock bets by stating its intention to issue a temporary ban on short-selling.
  • SEC Chairman Christopher Cox briefed Congress late Thursday of the agency’s intention to take the extraordinary step of interfering with the market’s regular functioning. Short-selling is a trading strategy of selling borrowed stock in hopes it falls and can be repurchased at a lower price.
  • It’s unclear if the SEC’s intention has been approved by the commissioners, which is required, and whether which stocks are covered or for how long it will be in effect. Earlier this summer, the SEC moved to restrict certain short-selling practices for 29 days, covering 19 financial stocks.
  • Thursday, the U.K.’s Financial Services Authority said it would ban short selling in financial stocks until January. The FSA said it would review the effect of the ban each month. The FSA also announced additional disclosure requirements from hedge funds of short-sales if a certain threshold is met.
  • The SEC’s decision comes amid increasing concern that short-sellers are abusing legal trading strategies to drive financial stocks lower. Since the near-collapse of Bear Stearns & Cos. in March, regulators have been looking into a combination of short-sales and false rumors are part of the problem.
  • U.K. Treasury Chief Alistair Darling, who was involved in the FSA’s decision, said in a statement Thursday, he welcomed the FSA’s “decisive action.” He said in current market conditions it was in the “interests of financial stability.”
  • In a short sale, a trader sells borrowed stock, hoping it will fall in price and can be repurchased later at a profit.
  • The pressure to step up efforts against short-selling gathered steam since last weekend when Lehman Brothers Holdings Inc. steered toward bankruptcy and Merrill Lynch & Co looked for a buyer. Wall Street executives urged Mr. Cox to take steps to slow the sell-off, which they believe is triggered by heavy short selling.
  • Investment banks are particularly vulnerable to low stock prices as it hurts their ability to raise capital to secure their funding.
  • The SEC sped up its rule-making and on Wednesday the SEC announced three trading rules that were aimed at curbing abusive short selling. That was followed late Wednesday night with intentions to require hedge funds to disclose more information about their short positions.

It’s unclear whether only financial stocks will be included, but this could be an early Christmas gift if true. It could take InterOil price significantly higher, and with the armory of the shorts already greatly diminished by the measures introduced today, it will be hard for them to bring it back down again.

Of course, all of this will not matter a great deal if the fundamental news out of InterOil in the coming months will disappoint, but for starters, we’re pretty sure the earnings in the quarter won’t. And, just one piece of good news might very well introduce an end-game for the shorts by putting them against forces they can no longer control, and then they will be forced to join them.

Tags: The Markets