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Ban on short sales set to end - what next?

On October 1, 2008, the Securities and Exchange Commission extended its emergency action prohibiting short sales of shares of certain financial companies to the third business day after the enactment of the pending federal legislation to stabilize the credit markets and financial system, but not later than October 17. The legislation, better known as the bailout bill, was passed on Friday, October 3 and immediately signed into law by President Bush.

The day after the ban was first announced, the ProShares UltraShort Financial ETF (SKF) was halted and when it resumed trading it barely budged. In the meantime, financials tumbled and many holders of SKF missed out on a 16% gain that day.

Since then, SKF has been trading reasonably in tune with the double inverse of the Dow Jones Financial Index (also the basis for the iShares Financial ETF - IYF). Despite, the ban on short selling, most of the stocks protected by the ban have fallen anyway.

ProShares has announced that October 9, 2008, it will resume its normal process of creating new shares of its ProShares UltraShort Financials (SKF) and ProShares Short Financials (SEF) ETFs.

This is good news for investors as spreads should be slightly narrower and the ETFs should more consistently trade closer to their net asset value.

What about the stocks that have been protected by the short selling ban? Many have already been crushed. Without the ban in place, will they take another leg down?

Consider the following:

At the July lows for IYF, at a time before Lehman collapsed, Merrill was sold, WaMu got taken under, etc., etc., the ETF fell to just under $60. Since then it traded in the $65 to $75 range. It wasn't until just this week on Tuesday that the ETF finally fell back below $60. After all these cataclysmic events in the financial sector, should the underlying index still be worth almost the same amount it was three months ago?

What do you think financial stocks go from here without the SEC to protect them?

Disclosure: long SKF

Comments

Anonymous said…
We have entered a dark era! Things aren't the same and probably won't be for a while. The credit freeze has effected us all - look what is going on with the spreads lately... and swap rates... crazy!
Speedmaster said…
Outlawing short-selling is like attempting to outlaw gravity, or shooting the messenger.
I agree! This is unbelievable! SEC initiates the ban, extends it, lets it expire and then considers instituting it again. No matter that it was roundly derided and appeared to have little or no effect. Dark era, indeed...

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