Wall Street Changes Diaper After FSA Bans Short Selling in Financials

Wall Street did not get the timeout I was hoping for going into the noontime hour, but the markets did get a lifeline...from the Brits, of all people:

Short-selling of financial stocks is set to be banned in the United Kingdom under rules drawn up by the Financial Services Authority.

The watchdog is poised to announce the ban after a week in which the shares of leading financial institutions have come under intense pressure as a result of turmoil in the financial markets. Short-sellers have been blamed for driving down the share price of HBOS, the banking group that on Thursday unveiled it was being rescued through a takeover by Lloyds, its UK rival.

News of the ban comes amid a growing political backlash against short-selling, which has been blamed for exacerbating the woes of the country’s banks, and for contributing to the crisis of confidence in some of the country’s largest financial institutions. It is unclear how long the ban will last. FT

The selling this morning gathered steam after the shares of the largest custodial banks took a nose dive. Shorts began to pile on State Street Corp (STT-NYSE) in the mistaken belief their securities filings in the shares of Morgan Stanley (MS-NYSE) meant large losses in their capital position. A more likely explanation might be that their mutual funds own it, but snafus in money markets/commercial paper turned into an out and out rout as everyone shot first and bailed out of any and all financials fearing funding would dry up and back offices would grind to a halt.

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VIX goes nuts
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Yes, there is more to it than that. This is the most extraordinary day I have ever seen. Various hedge funds are buzzing with news that widely followed DeMark indicators are on the verge of flashing buy for the S&P and Nasdaq, or at least suggested Friday was the day to buy, just before the rally commenced at 1PM EST. Like it or not, DeMark has huge street cred in Hedgistan.

And if you are not monitoring the Financial Times you are at a disadvantage, they are at the top of their game....and please take note the trading curbs extend to equity futures and equity options.

More later...but take note that the VIX is no longer trading in cougar country (40+)

And we gotta ask..is a hedge fund manager perp walk the next trick the regulators pull out of their hat?
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Panic in the VIX!

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Regulators on both sides of the pond are digging deep into their bag of tricks:

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FSA to ban short-selling of financial stocks
FT
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