Did the Short-Selling Ban Help?

At midnight on Wednesday, short sellers return to Wall Street. After regulators banned short sales of financial stocks to protect companies in trouble in the stock market three weeks ago, short sellers will be allowed to get back to business, but does it make a difference?

The New York Times reports that few expect their return to spark another plunge in the stock market. Financial shares have fallen 23 percent since the ban was imposed on September 22. This indicates that short-seller may not have had such a large role in the declines.

The Securities and Exchange Commission has taken additional steps to curtail short-sellers doing business. Short-sellers, who borrow shares and sell them, with the intent to buy them back later at lower prices while pocketing the difference, have faced stiff restrictions from the SEC.

The SEC has shortened the length of time allowed to locate borrowed shares for short-sellers and will require some investors to begin disclosing the stocks they short. Such restrictions could cause short-sellers to drop off altogether in some cases.

The results of the SEC ban are higher prices for borrowing shares. This is due in part because some big pension funds and endowments have stopped lending stock completely.

Professor Mozaffar Khan, a professor who has studied short-selling at the Sloan School of Management at the Massachusetts Institute of Technology, told NYT, “If there had been no ban, would they have gone down more?” Kahn believes that since studies are done during normal times, “we just don’t know in a state of panic what the outcome would have been.”

Hedge funds blame the rules for pushing them overboard. “There’s liquidity out of the marketplace,” H. Seth Berlin, the principal at Performance Thinking & Technologies, a hedge fund consulting firm, told NYT. “Did the ban really do what it was supposed to do? Probably not.”