Experts differ on effect of short-selling ban's expiration
— -- Markets braced for Wednesday night's scheduled expiration of the ban on short sales of more than 900 financial stocks, as investment analysts and advisers gave differing predictions on the potential impact.
The emergency ban is set to expire just before midnight, 13 trading days after the Securities and Exchange Commission imposed it with the aim of halting trading the agency said appeared to be "contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation."
The expiration is timed to take effect three trading days after President Bush signed the $700 billion financial system bailout approved by Congress last week. Although the SEC retained authority to extend the ban through Oct. 17, the agency announced no changes Tuesday.
The ban has temporarily halted a legal practice in which traders borrow shares and sell them in the hope of profiting by replacing the borrowed shares with equivalents bought later in the market at a lower price. But it's illegal to spread rumors or misinformation about a company in a bid to drive down its share price while short selling that firm's stock.
Many market players predicted the expiration would have little immediate impact, despite the stock market's volatility. "I don't know that you'll see any dramatic shift in positions," said Richard Baker, president of the Managed Funds Association, a hedge fund and managed future fund group that strongly opposed the ban. "Current market conditions and other factors will cause our members to move cautiously and slowly."
Hedge funds, which routinely use short selling, generally have not made bullish bets on shares of financial firms during the ban, said Baker. Thus, they have no immediate impetus to hedge positions with short sales.
The ban persuaded many investors to move to the sidelines, agreed Jon Najarian, co-founder of OptionMonster, a publisher of market intelligence on options and equity trading.
"I think when the prohibition expires, you'll actually see better markets," said Najarian. "Once all market participants have the ability to sell, as well as buy, they will see it as a game they understand."
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