Short Selling: A Great Debate
Did the SEC's Effort to Aid 19 Stocks Work? It is One Messy Autopsy
Wall Street Journal - August 14, 2008
On July 21, the Securities and Exchange Commission banned naked short selling in 19 financial stocks. On Tuesday night, the order lapsed, as scheduled.
Now comes the job of answering the critical question: Did the ban work? Whither the furious mergers-and-acquisitions speculation spurred by the battered stock prices of financial stocks covered by the ban.
This is one messy autopsy. The SEC standard was about protecting the "normal price discovery process," but really it seemed more motivated by preventing the 19 stocks from falling further. To the latter criterion, Bloomberg reported the 19 covered stocks as a group rose 26% since the SEC's July 15 announcement.
S3 Matching Technologies, an Austin, Texas, data firm, points out that Fannie Mae fell 40% and Freddie Mac 41%. Those two stocks provided much of the catalyst for the SEC's emergency order.
On the antiban side is a study from Arturo Bris, professor at Swiss business school IMD. He says the SEC didn't need to get involved because short selling accounted for roughly 12% of trading in the 19 stocks from Jan. 1 through July 15, in line with about 13% for other, similar U.S. financial institutions.
He also concluded that the SEC order meddled with market efficiency, that the risk-adjusted return on the 19 stocks actually fell for investors, and that the rest of the financial sector -- a sample size of 73 financial institutions traded on U.S. exchanges -- performed a lot better in the market than the protected 19.
Ultimately, the autopsy is unsatisfying, yielding no definitive up or down verdict. That said, talk of bailing out Fannie and Freddie has died down. The emergency order may prove a heck of a lot cheaper than a government bailout.