The Short End of the Short-Selling Stick


"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 press release. The ban on short-selling financial stocks is part of comprehensive plans being taken by the Federal Reserve, the Treasury Department and lawmakers on Capitol Hill. The SEC is also using emergency authority to require institutional short-sellers to disclose new short sales.

Regulators are essentially halting the practice of profiting when securities fall in value, a method most commonly used by hedge funds, as a means of easing the volatility in banking shares.

Shorting is the bread and butter of hedge funds, epitomizing the act of "hedging" against risk. A typical hedge fund will go short on half of all its trades. "It's a big problem for us," said one trader, who said the complete ban on short-selling was unexpected. "It's pretty extreme."

More here. And, one suspects, much more to come on this front.

reason on SEC head Chris Cox back in 1995, when he was a So-Cal congressman:

The former securities lawyer was in the headlines when Orange County declared bankruptcy in December. In fact, he broke the story when he was handed a note from the county's lobbyist during a meeting with reporters. The note read: "Urgent: Orange County may declare bankruptcy by 1:30 this afternoon. Please call the SEC to get the federal courts to freeze the asset pool" to stop investors from pulling their money out. Cox read the first sentence aloud—he later said he assumed the news was already public–and thereby precluded any behind-the-scenes federal intervention.

As the GOP's point man on financial markets and an Orange County representative, Cox would be the logical person to head any congressional inquiry into the bankruptcy. That means the county's financial shenanigans are unlikely to spark a witchhunt against derivatives or other esoteric securities.

As part of the Contract with America, Cox is principal sponsor of the Securities Litigation Reform Act, a bill that would make it more difficult for investors to file class-action lawsuits against the companies they invest in or the brokerage houses from which they take advice. Cox's bill would require an investor to hold at least a 1-percent stake in a security before filing suit; force plaintiffs to prove brokerages intentionally lied rather than merely gave bad investment advice; and make investors who lost lawsuits pay the defendants' legal fees. Nuisance suits when stock prices fall are pet peeves of growth companies in particular, including the high-tech communities in both Orange County and Silicon Valley.

More here.