Big Wednesday: Short Sale Rules Expire

by StockJockey

Sunday, August 10, 2008 - 2:08 pm

Ready to start pummeling your favorites financial shorts into the ground? Take Monday off, start shorting Tuesday, and pile on with your best buddies on Wednesday:

Short trading in 19 major U.S. financial stocks will revert to rules governing other shares on Wednesday as a Securities and Exchange Commission experiment against abusive short selling expires.

Market data company S3 Matching Technologies says short sales in the affected companies dropped after the emergency rule took effect but there is little consensus on how the market will react come Wednesday.

“My guess is that while this curtailed naked short selling in the short run, I suspect people found clever and sophisticated ways to work around (it) through derivatives,” said John Welborn, an economist with investment firm The Haverford Group who studies short selling.

But Dylan Wetherill, founder of ShortSqueeze.com, a Web site that tracks short interest, said the emergency rule maintained strength and balance in the affected stocks.

“If the SEC removes the rule, it will give the short sellers the edge in the market they are looking for,” he said.

Trying to extrapolate hedge fund performance by poring over 13-F filings is a relatively worthless task-you don’t know what types of derivatives, etc they are holding. And hedgistan is nothing if not resourceful and has probably adjusted to the new rules.

But it might matter for the legion of independent prop traders who work off intra-day leverage that would make even Jimmy Cayne blush...we shall see how this plays out. It could be much ado about nothing, and the damage to the free markets has already been done.

SEC short-sale rule ending; market move debated
Reuters

‘Naked’ short-selling rule set to expire
FT
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