SEC temporarily bans ‘short selling’ in 799 financial stocks

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The government made it official today: In the case of 799 financial stocks, prices should only go up for the next month.

Whether the feds get their wish remains to be seen. But the Securities and Exchange Commission’s emergency ban on ‘short selling’ of financial issues is having the desired effect this morning, driving share prices sharply higher.

The SEC said it acted because ‘recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities, in such a manner so as to threaten fair and orderly markets.’

In a short sale an investor borrows stock (usually from a brokerage’s inventory) and sells it, expecting the price to decline. If the bet is correct the investor can buy shares later to replace the loaned stock and pocket the difference between the sale price and the repurchase price.

Short sellers have been blamed for helping to hammer down shares of many banks and brokerages this year. Whether those stocks would have fallen just as much without the effect of the shorts, we’ll never know. In any case, the SEC has decided that the need for ‘confidence in our financial markets’ justifies fencing off financial-company stocks from short sellers for the time being.

The emergency rule is effective immediately and will be in place until Oct. 2. The SEC could extend it at that point, but the commission says the rule won’t be in effect longer than 30 days in total.

To see the order and the entire list of stocks now protected from new short sales, go here.