SEC Bans Short-Selling, Hedge Funds React

Sep 19 2008 | 9:29am ET

In a desperate effort to shore up the finance industry, the U.S. Securities and Exchange Commission has barred outright short-selling in nearly 800 financial stocks.

The emergency order, which expires in 10 days but can be extended for up to 30, covers the shares of 799 financial services firms. In addition to the short-selling ban, which is effective immediately, the SEC rolled out a series of other measures designed to curb short-selling, including new disclosure requirements.

The SEC moves follow a similar, four-month ban imposed by Britain’s Financial Services Authority yesterday.

“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. “The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress.”

Under the new rules, adopted during a late-night meeting of the agency, institutional money managers, including hedge funds, will have to disclose new short positions in some stocks. The SEC also gave companies greater flexibility to repurchase shares in an effort to boost liquidity.

The moves raised hackles from the hedge fund industry. Richard Baker of the hedge fund lobbying group the Managed Funds Association told The Wall Street Journal, “if in fact a company does fail, it will have nothing to do with the fact that someone on the outside noticed these deficiencies.”

Kynikos Associates’ chief James Chanos was less diplomatic.

“While this is all politically pleasing to the regulatory powers that be, the fact of the matter is that there has been no evidence presented of short-sellers circulating false rumors to drive down the price of stocks,” he told the Journal.

Just two days ago, the commission adopted three new rules aimed at curbing naked short sale.

Meanwhile, both Fed Chairman Ben Bernanke and Treasury chief Henry Paulson have asked Congress to give the federal government the authority to buy illiquid assets that are dragging Wall Street down. And New York State Attorney General Andrew Cuomo announced a probe into whether short sellers are spreading rumors to drive down stock prices.

Related Items:

Press Release: STANY Responds to SEC Actions on Short Selling


In Depth

Q&A: Brevan Howard’s Charlotte Valeur Talks Strategy

Sep 18 2014 | 11:18am ET

Charlotte Valeur chairs the board of Brevan Howard Credit Catalysts, an LSE listed...

Lifestyle

Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

September 2014 Cover

The London Whale: Rogue risk management

Credit default swaps brought down the London Whale and cost JPMorgan $6.2 billion. Here is how it happened.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.