SEC Moves to fall Fashion – No shorts allowed
New York – News that the SEC is considering the
implementation of stiffer rules on short selling is not really a surprise. The
fact that the rules are temporary and apply to a subset of stocks should be.
Clearly, the SEC is seeking to specifically target short sellers in the
financials, with additional emphasis on the shares of Fannie and Freddie. While short sellers are generally maligned in
times like this, it is the naked shorts that are targeted.
Existing rules state that the brokers for the client must
have a general idea that the shares that are being borrowed are available. The new rules to be instituted for a period
of 30 days (extensions are possible) will make clear that the brokers must have
the shares identified and must deliver them within the 3 day time period, or be
in violation of securities laws.
The rules seek to limit naked short selling, but also are
designed to send a message to those that would attempt to manipulate share
prices. Rumors are a part of Wall Street, always were and always will be. The
issue is not rumors, but the malicious spreading of false information. Some
market tracking news and analysis systems report market chattered to their
clients. These groups have a responsibility to check the rumors. However, it is
adding information to know that a rumor is “in the market”, so some of these
groups simply confirm this by hearing it from multiple sources before
publishing it. As a result, it is not the facts that are checked, but the
existence of a wide spread rumor.
Whether the short sellers are attempting to manipulate the
market or simply rationally assessing the value of the shares and the balance
sheet strength of the company is not readily apparent.
What is clear is that the preponderance of the hedge
funds—all generating alpha for their clients—and the extremely lax credit
conditions in recent years has produced the need for a serious correction in
the markets. As Michael Goldstein of Empirical Research has often said, there
is simply not enough alpha in the markets to pay the hedge funds’ fees that are
chasing it. The natural implication for hedge funds is to leverage up in
smaller spreads to increase profitability. This works, until the credit cycle
begins to wane.
Posted at 08:20 am by Thomas Hutchinson
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