Apparently, old habits die hard. Based on reports from WSJ – U.S. regulators are now having second thoughts about applying restrictions on short-selling for market makers.
If you recall, on Tuesday – the Securities and Exchange Commission took firm actions against short sellers. In an emergency order, the SEC announced that it would immediately move to curb improper short selling in the stocks of struggling mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), as well as those of 17 financial firms, including Goldman Sachs (GS), Lehman Brothers (LEH), Morgan Stanley (MS) and Merrill Lynch (MER).
However, in the last 48 hours dynamics of this issue seems to have changed in favor of the MM’s.
The SEC staff is now recommending a modification in the emergency order, and therefore is excluding market makers affecting short sales in those 19 stocks. The pretext used is the avoidance of “liquidity constraints”.
SEC spokesman John Nester said, “the proposed change would exempt market makers in the 19 stocks and their derivatives from needing to borrow shares in advance of short sales “in their market-making and related hedging activities” in the stocks.
In other words this restriction-exclusion of MM’s from short selling, and let’s just say it without spinning it – is basically, the SEC has just restored back MM’s carte blanche in its full capacity. But then again, no surprise there. These type of scenarios have become rather common at this point.
In the meantime, the American Bankers Association, a leading banking group, raised other concerns Thursday, urging the SEC to expand the order to include publicly traded commercial banks.
In a letter to Mr. Cox late Thursday, ABA President and Chief Executive Edward Yingling said “the group’s members worry that naked short sellers will focus on banks not covered by the order, further driving down their stock prices”.
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In my recent blog post [ http://babaksjournal.blogspot.com/2008/07/more-efficient-shorting-tactic.html ], I propose a hopefully more efficient tactic for shorting involving setting up a net hedged position in 2 separate brokerage accounts. The tactic is designed to mitigate the regulatory hurdles that make it difficult to *time* the short sale of a hard-to-borrow stock.
Shorts may find the idea useful.