Ban on short sales put a big dent in shares borrowed

The Securities and Exchange Commission's just-expired ban on short sales of more than 900 financial stocks caused a sharp reduction in shares borrowed in the securities lending market, a new analysis shows.

The emergency ban, which expired at 11:59 p.m. ET Wednesday, resulted in 41% fewer shares on loan compared with the amount lent when the SEC imposed the restriction last month, according to the analysis by SunGard Astec Analytics, a research firm that specializes in market information services.

"This, of course, means that short-selling activity has been reduced in these stocks, as was the intent," said Aaron Gerdeman, a SunGard product manager.

Short sellers borrow shares, often from pension funds or other institutional managers, then sell them with the hope of profiting by replacing the borrowed shares with equivalents bought in the market later at a lower price.

The SEC temporarily banned the common trading tactic amid allegations that some short sellers improperly spread misinformation or rumors to drive down the shares of the financial firms they were shorting.

The SEC is investigating the allegations.

Although the analysis showed what appeared to be a marked impact on securities lending, SunGard officials said it was less certain whether the SEC action affected the short-term or long-term prices of financial firms whose stocks were protected from short sales.

"There have been so many other forces affecting the fortunes of these financial companies that it's hard to know how much impact to attribute to the ban," said Richard Gates, founder and portfolio manager of TFS Capital, which runs a market-neutral fund.

Financial firms whose shares were blocked from short sales declined roughly 12.8% since the SEC imposed the ban on Sept. 19, according to a TFS Capital analysis. That compared with a 17.8% drop in the Standard & Poor's 500 during that same time, the TFS analysis showed.

"If the short sellers were driving these stocks down, I think the financial stocks would have done even better" during the SEC ban, Gates said. "Lack of liquidity, huge amounts of fear, frozen credit markets, and other problems are having a much larger impact than anything that the shorts are doing."