The expiration of a federal ban on short sales of more than 900 financial stocks hasn't prompted a feared new wave of bearish bets on those shares, new market analyses suggest.
Just over 2 billion shares of firms covered by the ban had been borrowed in the securities lending market — a short-selling indicator — as of Monday's close of financial markets, 13 trading days after the ban expired, according to SunGard Astec Analytics, a research firm specializing in markets data.
That represents a nearly 50% drop in share borrowing for the financial stocks since Sept. 19, the start of the Securities and Exchange Commission's temporary ban on short selling the stocks.
Nearly two-thirds of those stocks had a drop in shares borrowed between the ban's Oct. 8 expiration and Monday, while 30% showed an increase and 4% had no change, SunGard found.
Similarly, 9.4% of an average financial sector firm's outstanding shares available for trading were sold short as of Oct. 15, according to a separate report this week by Bespoke Investment Group, a financial research firm. That's down from a 52-week high of 13.1% in mid-July, Bespoke found.
Short sellers borrow shares, often from public pension funds, mutual funds or other institutional managers, and then sell them with the aim of profiting by replacing the borrowed shares with equivalents bought later in the market at a lower price.
The SEC imposed the temporary ban amid allegations that some traders illegally spread misinformation or rumors to drive down the shares of financial firms they sold short. The SEC is also investigating short selling of financial stocks since midsummer.
The ongoing decline in short-selling indicators appears to be "no longer just a matter of … the temporary ban," said Aaron Gerdeman, a SunGard product manager.
Hedge funds, often among large volume short sellers, may be avoiding the strategy amid redemption requests from their investors prompted by recent stock market drops, Gerdeman said. Mutual funds may also be less eager to lend shares, he said.
"Most companies doing trading these days are feeling more conservative," said Brian Traquair, SunGard's president of capital markets and investment banking.
Uncertainty over the potential for new SEC restrictions could also contribute to the decline in short-selling indicators. "If you don't know what's going to happen, or how the rules are going to change … you're not going to be as comfortable about shorting a financial stock," said Paul Hickey, Bespoke Investment's co-founder.