Announcement leads to 2.9% surge in futures on S&P Index.
The Securities and Exchange Commission halted short selling of 799 financial companies, pressing an assault on speculators after the collapse of Lehman Brothers Holdings Inc and American International Group Inc.
Futures on the Standard & Poor’s 500 Index surged 2.9 per cent following the announcement. US equities staged the biggest rally in six years yesterday after the SEC stiffened other regulations aimed at curbing manipulative trading.
“The shorting rules gave investors the belief the world is not coming to an end,” said Phil Orlando, New York-based chief equity strategist at Federated Investors Inc, which oversees $334 billion. “You had a lot of the hedge funds ganging up on these financial companies and putting them out of business.”
Hedge funds and investors who profit from share declines are being scrutinised after $3 trillion was wiped from stocks globally this week as financial shares swooned.
Goldman Sachs Group Inc and Morgan Stanley, the remaining independent securities firms on Wall Street, plunged by the most ever, prompting Morgan Stanley Chief Executive Officer John Mack to say short sellers are using abusive tactics to attack companies.
Financial regulators in the US and UK, attorneys general in New York, Texas and Connecticut, and the three largest US pension funds all began cracking down on short sellers this week.
The SEC said today that it will halt short selling of US banks, insurance companies and securities firms through October 2, while the Financial Services Authority in the UK banned short sales of financial shares for the rest of the year.
Banning Shorts: New York Attorney General Andrew Cuomo started an investigation into whether investors illegally drove down stock prices of financial firms. The California Public Employees’ Retirement System, California State Teachers’ Retirement System and the New York State Common Retirement Fund decided to stop lending shares for short sales.
Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.
In a practice called naked short selling, traders never borrow the shares, raising concerns that investors are flooding markets with sell orders to drive down prices.
Market Disinfectant: Earlier this week, Chairman Christopher Cox proposed hedge funds and investors managing more than $100 million “promptly begin public reporting of their daily short positions.”
