Convenient scapegoat: ‘Short sale’ ban lifts, stocks dive

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Blame the ‘short sellers’?

That’s going to be tempting for many investors today, after the market plummeted again -- one day after the Securities and Exchange Commission’s ban on shorting about 1,000 financial stocks expired.

Coincidentally, financial issues led today’s selling wave: The financial-sector index within the Standard & Poor’s 500 plunged 11.7%, compared with a 7.6% drop in the S&P 500 overall.

We’re talking massive declines in some big-name shares. Morgan Stanley sank $4.35, or 26%, to $12.45. Prudential Financial dived $10.02, or 23%, to $33.27. Bank of America lost $2.47, or 11%, to $19.63.

Maybe the shorts couldn’t wait to get back to betting against these stocks again, after the SEC took away the right to short them beginning Sept. 19 -- part of the federal government’s plan to help restore ‘stability’ to markets. Many traders were pointing at the shorts today, noting a surge in trading volume in some of the session’s biggest losers.

But short sellers have become a convenient scapegoat for everything that ails the financial sector -- as if the companies never made a bad loan or bought a toxic collateralized debt obligation.

Here’s an interesting statistic, just out from the New York Stock Exchange today: Total short interest in all NYSE-listed shares -- the number of shares borrowed and sold, typically in a bet the price would drop -- fell from 17.1 billion on Sept. 15 to 14.8 billion on Sept. 30, a 13.4% decline.

The new total was the lowest short-interest figure since mid-February.

On Nasdaq, short interest slid from 9.89 billion shares on Sept. 15 to 8.88 billion on Sept. 30, a drop of 10%.

The decline in the number of shorted shares tells us that many short sellers were buying stock to close out their positions in late September.

So even though the market faced less downward pressure from short sellers -- and indeed, even though the market was getting help from the shorts, as they bought stock to replace borrowed shares -- major indexes still fell between Sept. 15 and Sept. 30.

The S&P 500 gave up 2.2% in the period; the NYSE composite was off 1.9%; the Nasdaq composite lost 4%.

And even though financial stocks couldn’t be shorted in the first three days of this week, the S&P financial-sector index dived 17.8% in that period.

Blame the shorts?

One last stat: Short interest in Morgan Stanley plunged from 45.3 million shares on Sept. 15 to 18.4 million on Sept. 30. The stock still tumbled 40% in that period.