Hallie Elsner from Thomson Reuters’ Corporate Advisory Services group discusses Short Selling
Transcript:
Sharp declines in financial and other stocks has prompted some to point the finger at short sellers, and emergency rules seeking to limit market manipulation have been put in place by the SEC.
I’m Hallie Elsner and in this Corporate Advisory Insight with an update on short sales.
NYSE short interest is up over 10% since March, while the S&P 500 has traded sideways since that month’s lows as investors are apprehensive about the current earnings season. Bear Stearns headlines have now been replaced with other names among the financial sector, and some are questioning the solvency of the entire financial system.
You may recall from our previous segment on short sales that those who “short” shares are selling shares borrowed from another institution, with the intent of purchasing the shares back at a lower price at a later date. The most recent SEC action stipulates details of the borrowing arrangement, ensuring that shares are actually borrowed. Naked short sales, those where shares are not actually borrowed, may be used by manipulators seeking to send a stock lower.
On July 15th, the SEC announced an emergency order that increased the regulations in the short sale of 19 financial sector stocks, which went into effect on Monday July 21st. The order requires short sellers to arrange the borrowing and delivery of securities ahead of a short sale. The SEC also announced that it will be making changes that address similar issues across the entire market. Initial reactions indicate that these regulations are likely to increase borrowing costs and drive some investors to pursue an options strategy or private short sales away from the market instead.
In addition to altering actual investment strategies, the new rules are said to have caused somewhat of a scramble among investors seeking to secure borrowed shares prior to the regulations taking effect. Some firms also needed to alter the way they keep track of short sales.
The effectiveness of this and any further regulations remain to be seen, as do the broader effects that these rules will have on financial markets. Some point to historical changes in short sale regulations, which caused a brief short squeeze in the markets, after which declines continued, as an indication of the only temporary relief such changes may cause.
I’m Hallie Elsner and this is corporate advisory insight.
Duration : 0:2:13
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