The SEC Continues Their Attack on Short-Sellers By Proposing a Temporary All-Out Ban of the Practise

There is an article out on WSJ.com tonight (link below) with the title "SEC Plans to Temporarily Ban Short-Selling." I read and re-read the article, and my eyes still can't believe what they are reading.

According to the article, SEC Chairman Christopher Cox briefed Congress late Thursday night, and stated that it is the SEC's intention to temporarily ban ALL short-selling. Not just banning the short-selling of distressed financial companies, but banning the short-selling of every listed stock in the United States.

It is not known how long this ban would last or exactly which stocks that the ban would cover (it sounds to me like it would be all stocks.)

I'm really surprised that the SEC is taking their stance on short-selling this far. Banning naked short-selling, sure. Enforcing a temporary ban on the short-selling of under-siege financial companies? Ok, I can see that too. But an all-out ban on short-selling? Wow.

For those that don't know, short-selling is when you profit when a stock trades lower. Instead of purchasing a stock, you "sell" it and then buy it back (hopefully) at a lower level. How do you sell the shares without owning them first? You borrow the shares from someone that owns them, and then you sell the shares. If you buy the shares back at a lower level than where you initially sold them, then you make a profit. If you have to buy them back at a higher level, then you lose money. Short sales can be especially risky because your loss is potentially unlimited. For instance, if you "short" a stock at $10 and it trades up to $40, then you would lose 300% of your original investment. On the other hand, a "long" position is limited to a 100% loss (a stock can't trade lower than zero.)

Anyways, back to the topic of this post - the proposed SEC ban on short-selling. I have quite a few questions as to how this would work. What about companies who use short-selling as a means of hedging their positions? What about existing short positions - would people be forced to cover? Or would this just apply to initiating new short sales? Which stocks would this cover? How long would the ban be in effect for?

Please note: this ban is not in effect as of yet, as it would need to get proper approval. However, according to the Financial Times, an announcement could come as soon as Friday.

Source: SEC Plans To Temporarily Ban Short-Selling (WSJ)


Filed under: General Market News