SEC Puts Halt On Short Selling Stocks

Temporary Ban Of Betting Against Stocks Implemented To Stem Widening U.S. Financial Crisis

(AP)  The U.S. Securities and Exchange Commission took the dramatic step early Friday of temporarily banning the routine practice of betting against company stocks.

The move, announced on the agency's Web site, is a reflection of regulators' concern about the widening scope of the financial crisis as entreaties come from all quarters to stem a swarm of short selling.

In the announcement, the commission said it was acting in concert with the U.K. Financial Services Authority in taking emergency action to "prohibit short selling in financial companies" to protect the integrity of the securities market and boost investor confidence.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC chairman Christopher Cox said in a statement. "The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets."

The move, he said, would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the Federal Reserve, the Treasury and Congress.

A recent wave of the market maneuvers - where traders seek to profit by selling shares they don't own in the anticipation the prices in the company will drop - has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big companies.

Cox, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting Thursday night with members of Congress.

The SEC said its action calls a time-out to aggressive short selling in financial stocks and said it would consider measures to address short-selling in other publicly traded companies.

Short selling, in a normal market, contributes to efficiency while adding liquidity to the markets. But now, the SEC said, it appears that "unbridled" short selling was contributing to the sudden price declines in the securities of financial institutions.

On Wednesday, New York Sens. Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for such a temporary ban, saying the watchdog agency "has the power to take a temporary but important step to help restore a measure of stability to our financial markets."

[efletch1220]

Nito,

Perhaps I should state my position that I am not blaming the current conditions on shorting. Rarely does one single factor cause a calamity. I am, however, generally opposed to shorting and am taking the opportunity to get my jabs in while the subject is hot. Yes, I am aware that professional short-sellers will refute my position, but that is expected when one plays around another''s source of income.

[incog-nito]

My whole point is this: While there are instances of abuse (short or long), blame the CEOs for incompetence, but don''t blame the shorts. The vast majority of investors do not short. Like the housing market, they keep buying hoping to sell back for more. That keeps the whole market constantly inflated above its true value. And when the bubble finally bursts and the shorts take advantage of it, they get scapegoated. They are just not enough shorts to do the damage that the longs cannot do to themselves.

[incog-nito]

efletch1220: Yes you are getting close. But as an individual investor you don''t have to worry about naked shorting. If the brokerage won''t let you short, then end of story.

Having said that, I think shorting is more risky for the person doing it, NOT for everybody else (as the article suggests). Even if you''re right about a company doing bad and think the stock will go down, investors tend to be hopeless optimists. They''ll hang on to their shares hoping it will go back up. Or they''ll average down and BUY more shares. All this hoping and buying props the price up, putting the shorter more at risk.

[efletch1220]

Nito,

Ah, I think we are getting closer to the crux of the matter now!

"the brokerage house probably owns some of that stock already"

but even if the brokerage house does *not* own some of that stock, it is available at the "clearinghouse" -- Cede & Co. ... and of course, in some cases, the clearinghouse has loaned out more stock than is available and generates that nasty term - naked short selling. Am I close?

You have probably correctly surmised that I do not actively short. I was a victim of the system 5 years ago ... lost some shares {poof} ... it took me almost 2 years to get them back. But I certainly learned more than I bargained for.

[incog-nito]

efletch1220: Think of it simply as a financial device to allow to do the opposite of traditional investing. Like you mentioned there is no actual stock certificates anymore. It''s just a concept (except with real money). If you''re still curious, here''s how it works: When you short a stock, the brokerage house probably owns some of that stock already. They lend it to you to sell, with the idea that you will buy back at a later time, then return the shares to the brokerage house. The transaction is then complete.

[efletch1220]

Nito,

If I forget the "borrowing" part of shorting, the trader has nothing to sell. It is not logical. One cannot sell what he doesn''t have -- even if it *is* borrowed.

[incog-nito]

efletch1220: Forget all about the "borrowing" part and all that stuff. In reality it''s a lot simpler than that. The idea of investing is "buy low, then sell high". Shorting is simply "sell high, then buy back low". That''s all there is to it. Just substitute the word "short" for sell and "cover" for buy back, and you''ve got the terminology down. If you have an online trading account, you short pretty much the same way as regular trading. You don''t have to ask to borrow shares or anything like that. Some stocks, usually "penny" stocks that are considered risky, cannot be shorted.

Like I said, shorting allows the astute investor to make money (or lose money) in any market, up or down. Otherwise you''d be waiting for years like the rest for the market to go back up.

[efletch1220]

I just couldn''t take it anymore. Many of us shareholders do not understand the mechanics of a financial system that allows short selling. I share a simple example in my blog: http://tinyurl.com/3orsq5

[chrisbieber]

so who really WON WW2???

didnt we fight and die and triumph over FASCISM ie NATIONAL SOCIALISM????

and didnt we WIN the Cold War over SOVIET SOCIALISM ie communism????

I guess their ideas and philosphy and "solutions" won...

Regimentation and controls...

we need MORE and MORE to "fix" the "freemarket" that we have "enjoyed these last almost 80 years...a New New Deal.

Just as bipartisan as it was in 1932...

great..

with one rhetorical inconsistant militarist vs a banking and government shill community organizer...

a real "Hobson''s Choice" of 2 false alternatives....

and to think the Republicans with their support of "free market" RHETORIC dismissed and, like Benito McCain and Willard Mitt Romney, LAUGHED at and DISMISSED Ron Paul and his message of freedom and warnings about the socialist trainwreck that is now hitting...

thanks you servile SkinnerBox mazecrawlers Repugs...hope you enjoy your big piece of cheese at the end of the election maze......

[jack773]

Traders lose more than they win, otherwise the math wouldn''t work.
To blame a recession on Wall Street professionals and the average man and woman on the street is certainly a stretch.
In the first place this "recession, or financial crisis" is not technically a recession certainly, and really a bad bump as far as financial crisis go.
A few banks got caught with their pants down and everybody''s yelling how terrible it is.
Well those banks should eat it, because they knew the risks going in, and the taxpayers should have nothing to do with that.
If it wasn''t politically incorrect, the media would publish racially who had most of the bad loans and defaulted and are still defaulting, which started the whole scenario!
In reality the entirity of Wall Street and inflated housing values are a gigantic house of cards. There is so much nonvalue in the Dow at 11,000 that it could realistically drop to 4 tomorrow or perhaps even 2 which is probably it''s approximate true value. It''s similar, including weather patterns and people''s attitude, to what happened in 1929. Try to borrow $ 10,000 to invest - EZ - that''s a big part of the problem.

[incog-nito]

Is it too late to short the American Dream?

Posted by ubrew12 at 07:37 PM : Sep 19, 2008

Nope. As long as outsourcing continues the economy will not recover any time soon (disclaimer: this is not investment advice).

[ubrew12]

Is it too late to short the American Dream?

[incog-nito]

Efletch1220: A lot of people bash traders, but this is a relative term. Investors bet on a stock just like traders, except for a longer period, or they just hand off their money to someone else (fund managers) to bet for them. The trading time frame could be months, weeks, days, hours, or even minutes. To say a trader is somehow inherently greedier than an investor is wrong, in my opinion.

[efletch1220]

Nito,

I appreciate your comments. It appears we have different goals for our investments, and that''s OK. Not wrong, not right -- just different.

The housing market has it''s own set of variables which have been influenced by a host of inputs. I know. I manufacture residential building products for a living. I''ll cease on the topic so as not to completely hijack the thread at this point.

Have a nice weekend.

[incog-nito]

Efletch1220: The whole idea is to provide liquidity. Not only you can buy shares when you want, you can also get out quickly and cut your losses (provided you get out quickly enough). The housing market is not at all liquid, and that''s why a lot of people are hurt. In a lot of cases they can''t sell the house even if they want to do it and take a loss.

[efletch1220]

Nito:

I''ve just done a bit of catch-up reading myself. As I understand it,"Material" shares (paper) are no longer permitted on the NYSE or NASDAQ. I''ve been away too long.

Help me understand, "Wall Street traders are required to sell shares to the public even if they don''''t own it." You see, I am not one who seeks to gain from the minor ups and downs in the market. I risk my money on firms who I feel will be productive (profitable). If I feel they will not, I sell. I do not try to get "something for nothing" which is my take on day traders. (Is that term still used?). Regardless, just because a third party -- Cede & Co. -- holds the shares does not give anyone the right to loan out my shares for someone else''s benefit. I have broadband to my house ... if someone wants to borrow the shares (at some cost, of course), I can acknowledge them in scant seconds. This technology did not exist in ''68, so some of the logic that got us to where we are needs re-evaluation.

That''s how a simple mind sees it from here. Thanks for the intelligent comments.

[incog-nito]

Efletch1220: See my previous post on the mechanics of shorting. All this holding a stock certificate in your hands sounds great if you''re a long, long term investor. It doesn''t reflect the reality of today''s markets. Wall Street traders buy shares and sell them back in a matter of minutes. They short because they are required to sell shares to the public even if they don''t own it. They have to make a market. Coincidentally that''s why they''re called "Market Makers". This is what''s providing the liquidity in the market. If you want to buy shares you can ALWAYS do it, provided the price is right.

[efletch1220]

1) Lay off the political stupidity ... this is a problem that predates the last few administrations.

2) I''ve never seen a well-presented case where short selling improves the market at all. Much rhetoric, but little substance. All defenses of short selling the key activity of "borrowing stock." "Borrow from whom?", you might ask. Who in his right mind would loan his shares to someone who will make money off those shares? Well, my friend, take a look in a mirror. If you own any stocks, check the fine print in your next 401K statement. Unless you are holding a certificate, you are merely the "beneficial owner" of those shares. The financial firm Cede & Co. or the Depository Trust Company has ownership and control of the stock -- until you place an order with your broker to sell. I can guarantee you that no one has ever asked my permission to "borrow" my shares, nor have they compensated me when they did so, but you can be sure that you only control your shares of stock the day you buy them and the day you sell them.

Don''t take my word for it. Do your own research. Then convert your stocks that you are holding long-term into certificate form and get them into your own two hands. Short sellers can''t touch dat.

And now back to you, Chet.

[bckrd1]

while Cox is at it, stop speculation of energy stocks too as that is hurting everyone but the wall street guys.

[incog-nito]

First of all, this is not a total ban on short selling, only financial stocks. Second, it''s nothing more than a ploy to shift blame onto investors and traders. The real culprits are the CEOs and executives who mismanage their company. Short-selling is done by Wall Street all the time. When a stock is hot and people scramble to buy, Wall Street is required by law to make a market, that is, sell the stock even if they don''t own the shares. So they short sell the stock, usually at a big markup. People should have the same trading tools that Wall Street has. Short selling allows the astute investor to make money in any market, up or down. Banning it will handicap the investor, to the benefit of Wall Street.