Will short-selling ban help – or hurt – banks?

London and New York stopped a practice seen as pushing stocks down. But some say short-sellers are merely scapegoats.

from the September 22, 2008 edition

Page 2 of 2

Page 1 | 2

Short selling is often considered a virtue inasmuch as it brings liquidity to the market, allows investors to position themselves appropriately, exposes bad management and amplifies company weaknesses for all to see. If the stock market is a gauge with a plus and minus reading, without short sellers, it's as if the needle can't read the minus side properly. "If by their speculation, speculators draw attention to the more deep-seated weaknesses in a stock, they are doing people a favor," says Mr. Batstone-Carr.

"It provides a hedging facility so that people can go into the market and manage their position," adds Justin Urquhart Stewart, director of Seven Investment Management. "It's a sensible way of operating, but it sounds like gambling so it gets a bad reputation,"

Some traders are adamant, moreover, that short sellers were not the mercenaries they were made out to be last week. Data shows that trading in HBOS was not particularly irregular.

"When you look the volumes of short selling in HBOS on the day, there was little trading that day," says Mr. Urquhart Stewart. "It was an unstable market and companies should have been suspended. That would have given time to look at alternatives and perhaps form a lifeboat."

"To blame the short sellers for the demise of these stocks does not give us the real picture," adds David Buik of BGC Partners. "Marketmakers, brokers, and fund managers have all contributed to the demise of these stocks. To blame it on short sellers is totally naive."

Ken Clarke, a former chancellor of the exchequer (the British equivalent of US Treasury secretary), said, "If you are going to find scapegoats, find the right ones: the people in the banks who just gave up traditional banking and stopped assessing risk and listened to young rocket scientists who took the debt off the balance sheet and engaged in creating investment vehicles that nobody really understood," he told BBC radio.

Some market players say that the ban will not end short selling but will just deflect trader attention to another weak sector like retail companies. Others warn that the ban will drain liquidity from the market, meaning that any trade in financial stocks will be amplified, contributing to volatility.

Other market insiders say that the move could actually hurt the bottom line of the very financial institutions that the authorities are desperately trying to help. Short selling is part of the everyday operation that sustains firms like Morgan Stanley and Goldman Sachs.

"I'm afraid the regulators have perpetuated the crisis," says Batstone-Carr. "I thought we'd be able to close the book, but now it's going to go on for a few more chapters yet."

1 | Page 2