SEC bans short selling of financial stocks

— -- The Securities and Exchange Commission issued a temporary ban Friday on short sales of 799 financial stocks, a dramatic move against traders who have sought profits from the most severe market crisis in decades.

Short selling is a legal form of stock trading in which a trader bets a stock's price will drop. The trader borrows the stock and sells it, with the understanding the loan must be repaid with similar shares bought in the market. If the stock does drop, the trader profits on the price difference.

It is illegal, however, for short sellers to spread false information or negative rumors in an effort to drive down a stock's price.

The SEC said the action "calls a time-out to aggressive short selling in financial institution stocks, because of the essential link between their stock price and confidence in the institution."

In its early-morning announcement, the SEC said ban the ban would remain in effect until midnight Oct. 2. But it could be extended for 10 additional business days if the agency "deems an extension necessary in the public interest," the SEC said.

Speaking at the White House hours after the ban took effect, President Bush said the SEC action "is intended to prevent investors from intentionally driving down particular stocks for their own personal gain."

SEC Chairman Christopher Cox, criticized by both Republicans and Democrats for not responding more quickly to this week's financial market crisis, said the agency is considering additional measures against short-selling in other stocks.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," Cox said.

The SEC ban mirrored action taken Thursday by Britain's Financial Services Authority.

It also came one day after the SEC adopted rules aimed at forcing traders and brokers to actually borrow shares used in short selling. Additionally the SEC on Thursday enacted a rule that bans sellers from deceiving brokers about delivering borrowed shares to buyers.