Last night we got the incredulous news that the SEC was planning some kind of ban on all short-selling. I, and many others weighed in on the matter but understood that details were sketchy at best and our initial reactions could be premised on false assumptions.
Well, it's now official and - frankly - is somehow even more stultifying than I could have imagined.
Banning short-selling made no sense. But the SEC has done one better (or worse depending on your perspective). The SEC has, effective immediately, banned short-selling on financial stocks. For official details, read here:
Here are a few of the key bullet points:
- 799 financial stocks protected from short-selling
- Order is effective immediately save for market makers through quad witching
- Order lasts until October 2nd if not further extended beyond that
On the surface, I'm sure some people are looking at this as a more rational decision than an outright ban on short-selling any equity. I disagree, for two reasons:
- Financials are, fundamentally, one of the most troubled sectors -- Short-selling is a bet against the performance of an equity. Generally the decision to short is premised out of some belief/analysis that the underlying fundamentals (or technicals in some cases) of a company are impaired or on the precipice of difficulty. Why then does it make sense to prevent shorting in one of the, if not THE, most fundamentally impaired sectors? The inverse of this would be like preventing investors from buying commodity stocks globally over the last few years.
- This artificially creates added short-sale pressure on other sectors -- A ban on short-selling would've probably caused an artificial rally in equities and, yes, probably an equally painful sell-off once the ban was eventually lifted. By limiting the ban to the financial sector, the SEC is all but guaranteeing that billions of dollars of short book are going to be reallocated to other sectors. Hedge funds aren't going to stop running net neutral books just because the SEC wants financial firms to feel warm and fuzzy until the start of October. So that means any other sector is now going to have enormous pressure shifted to it by those who either want to, or have to run short exposure.
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