NEWS

Financial Times correspondent John Keefe (“A New Reality for Oft-Blamed Short Sellers,” August 2, 2009 http://www.ft.com/cms/s/0/5ddd5a84-7f4f-11de-85dc-00144feabdc0.html ) looks at the regulatory climate for short selling. He notes that the October 1987 stock market crash and the bursting of the technology bubble occurred while the uptick rule was in place. Even though short selling in financial stocks was banned in mid-September 2008, the sector dropped 25 percent over the ban’s period.

” ‘I think the fundamentals of those stocks, rather than short-selling, were driving what happened, and the studies that I’ve seen trying to tie together short-selling with the decline haven’t proven that [connection],’ argues Gus Sauter, head of equity trading at Vanguard Group. A recent SEC internal study found that price drops in September 2008 were primarily the result of selling by those with long positions.

“Academics and trading practitioners agree that the presence of short-sellers increases the efficiency of financial markets, both for price discovery and liquidity. But short-selling got a bad name in the crash of 1929, Mr Sauter notes, and even gained a seditious connotation: ‘You know, they say you’re not supposed to ‘sell America’, you’re supposed to ‘buy America’. But today there are legitimate investment strategies that take both long and short positions, to take advantage of mispricing, and they’re beneficial to the market.’

“The reality is that short-selling is seldom undertaken as a standalone strategy, but instead as part of a hedging programme. ‘Almost all people that short stocks are professional traders, and almost all traders that short stocks run a long/short book,’ observes Dan Mathisson, head of Credit Suisse’s Advanced Execution Services unit in New York. ‘Very few traders run net short – less than 1 per cent of hedge fund assets.’ ”