In a purported move to stabilize trading in financial equities, the Securities and Exchange Commission curbed the short selling in 19 stocks, effective July 21 through July 29. Short sellers in the securities must borrow the stocks before going short and deliver them at settlement. The commission may extend the emergency order up to 30 days. The roster of securities included in the action: BNP Paribas Securities Corp.; Bank of America; Barclays; Citigroup; Credit Suisse Group; Daiwa Securities Group; Deutsche Bank Group; Allianz; Goldman Sachs; Royal Bank; HSBC Holdings; JPMorgan Chase, Lehman Brothers; Merrill Lynch; Mizuho Financial Group; Morgan Stanley; UBS; Freddie Mac; and Fannie Mae.
“Today’s commission action aims to stop unlawful manipulation through ‘naked’ short selling that threatens the stability of financial institutions,” said SEC chairman Christopher Cox in a statement. The order, which was issued July 15, talks about the “dissemination of false rumors…For example, press reports have described rumors regarding the unwillingness of key counterparties to deal with certain financial institutions. There also have been rumors that financial institutions are facing liquidity problems.”
The SEC may expand the list of institutions covered by the order, but why National City Corp. and Washington Mutual weren’t included is baffling. The American Bankers Association is unhappy about the incompleteness of the list. “Our fear is that when this order goes into effect [on July 21] those market participants that are actively involved in executing short selling strategies on those publicly traded banks and bank holding companies not covered by the order,” ABA president and CEO complained in a July 17 letter to SEC chairman Christopher Cox and Eric Sirri, director of the commission’s division of market regulation.
The SEC move seems largely for show. Market makers are excluded. Underwriters and syndicate members involved in various transactions are excluded. Even though short sellers have to borrow the stock, their word is apparently good enough for the SEC. In the real world, assurances from rumor mongers are suspect at best.
