The Short-Selling Ban: A Post-Mortem

Floyd Norris gets out his calculator this morning and crunches some numbers on short-selling and stock performance during the now-expired period when the SEC banned naked shorting of 19 financial stocks.

As you might expect, there aren’t any obvious conclusions. The stocks rose over the period in question — but then again financial stocks which weren’t on the list rose more. Short interest in the SEC-named companies declined, even as it rose among their competitors — but then again "the range of the changes in short position was very wide among both groups".

My feeling is that the SEC’s action was more of an insurance policy than it was an attempt to drive stock prices up or short interest down. As it happens, there wasn’t any kind of attempted bank run during the period when naked shorting was banned — which is quite possibly exactly the result that the SEC wanted. There probably wouldn’t have been one anyway, of course, but the SEC might just have wanted to play things as safe as possible in an environment where there was a very real risk that shareholders in Fannie and Freddie could be wiped out.

Still, with any luck we won’t see the return of this rule any time soon. The misinterpretations alone should be reason enough not to start changing the architecture of the capital markets in the middle of a crisis. I hope that the SEC will take the data from this experiment, sit on it, crunch it umpteen different ways, and eventually come out with recommendations and a request for feedback. So long as there’s no indication the SEC is panicking, we’ll probably be OK.