|President George W. Bush pictured with SEC Chairman Christopher Cox, in the White House Oval Office. On Thursday, Senator John McCain said that Cox should be fired. |
The US Securities and Exchange Commission (SEC) plans to issue temporary ban on short-selling. Irish and UK regulators announced on Thursday bans on short selling of financial stocks.
Short-selling is an established market practice in which traders aim to profit from falling stock prices. Traders argue that shorting can act as a corrective force at times of rampant bullishness in markets.
A trader borrows stock and then sells it, in hopes it will later fall in price. If it does, the short seller then buys the stock in the open market at the lower price, returns what was borrowed, and pockets the difference. Naked shorting is the practice of selling stock short without taking steps to borrow it.
In recent years, the growth of hedge funds has resulted in a boom in shorting and last July when the SEC issued a temporary ban, the Wall Street Journal said that short interest, or the amount of short positions outstanding, was at an all-time high, at 18 billion shares, for NYSE Euronext listed stocks.
This week, daily volume on the New York Stock Exchange hit an all-time record above 9 billion shares changing hands.
SEC Chairman Christopher Cox briefed Congress late Thursday of his agency's intention to issue a temporary ban on shorting.
The Wall Street Journal says it's unclear if the SEC's plan has been approved by the commissioners, which is required, and 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.
The SEC's decision follows widespread concerns that short-sellers are abusing legal trading strategies to drive financial stocks lower. Since the near-collapse of investment bank Bear Stearns. in March, regulators have been looking into a combination of short-sales and false rumours of volatile stocks.
Calpers - California Public Employees' Retirement System, the largest US public pension fund - is no longer lending out shares of Goldman, Morgan Stanley or Wachovia. Lending of shares is an essential step in the short-selling process, and the move could help limit negative bets on those stocks.
As investment banks do not raise deposits, they are vulnerable to low stock prices as it impacts on their ability to raise funding.
On Thursday, the UK'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 and it also announced additional disclosure requirements from hedge funds of short-sales if a certain threshold is met.
The Chancellor Alistair Darling said he welcomed the FSA's "decisive action" and in current market conditions it was in the "interests of financial stability."
The Irish Financial Regulator also introduced provisions to prohibit short selling of stocks on Irish publicly quoted banks from midnight Thursday.
"These measures are consistent with those introduced in the United Kingdom where Irish stocks are also listed. These provisions are necessary to ensure the orderly conduct of the market at this time. These measures will be kept under continuous review and the Financial Regulator may issue guidelines on application of these rules as required,"the FR said in a statement.
The FN's new regulation states:
With effect from midnight on Thursday 18th September 2008, the Market Abuse Rules (March 2006) are amended by the insertion of the following Section 10:
10. SHORT SELLING
10.1 A person, other than a market maker, may not enter into any transaction, transactions or arrangements which have the effect of generating a net economic benefit which would arise from a fall in the price of the shares of either the Governor and Company of the Bank of Ireland, Allied Irish Banks Plc, Irish Life and Permanent Plc or Anglo Irish Bank Corporation Plc.
10.2. On 23rd September 2008, and each business day thereafter, by 3.30pm each person who has on that day an economic interest involving 0.25% or more of the issued share capital to which Rule 10.1 would have applied if entered into after the issuance of this Rule, shall make disclosure on an RIS system setting out the name of the person who has the position, the company in which the position is held and the amount of that position.