Financial and Auto Stocks Short Selling Declines Sharply

Short selling of financial and automaker stocks has fallen sharply since July – according to Reuters. Both sectors have remained under heavy selling pressure from beginning of the year and have been blamed for causing disruption in the functioning of the securities markets creating often a crisis of confidence.

Based on Short Alert Research data released this week, short interest on financial companies has fallen since July 10 nearly 40% to an average of 3.68% on Nov. 14. Among brokerages, the decline in short interest was even greater. It reached 43.5%.

Short interest in automakers has also decreased significantly – declining 32% in the past five months to roughly 11.5%, with short calls on General Motors (GM) halving since August. The decline comes as result of short sellers becoming aware of the fact that PPS deterioration in the financial sector and the auto industry has led stocks to historical lows. Shares of Citi (C) hovered around their lowest levels since 1994 last week, while GM stock fell to its worst levels in 70 years. With stocks prices scraping these lows the potential for gains on the part of short seller diminishes significantly while the risk for upside increases – prompting them to take their bets off.

Several companies, including Lehman Brothers (LEHMQ.PK) and Citigroup, have blamed short selling for driving down their co.’s stock prices. On Nov. 20, Citigroup sought to revive a prohibition on short-selling financial stocks by discussing with the Securities and Exchange Commission a proposal to reinstitute the ban on bets that stock prices will decline.

However, while the financial and stocks’ performance could have been even worse if short selling had been allowed, the effectiveness of the ban at this point is very much in question. Financial stocks performed worse than the market from Sept. 19 through Oct. 8, the period of the short-selling ban. Market data firm, S3 Matching Technologies, said it found no statistically significant differences between stocks covered under the ban and those that were not.