A three-week-old ban against betting that financial companies' shares would fall expires tonight, a move some large-scale investors say could actually help limit the punishment many of those stocks have endured in recent days.
Some market experts say the unprecedented ban on short selling initiated by regulators – an effort to bolster investor confidence amid the worst financial crisis since the stock market crash of 1929 – did more harm than good at a time of historic market volatility.
“Short selling is very important to our markets,” said Chester Spatt, a former chief economist at the Securities and Exchange Commission, which put the ban into effect Sept. 18. The ban “isn't a panacea by any means for financial firms.”
Short-sellers bet against a stock. The practice, which is legal and widely used on Wall Street, involves borrowing a company's shares, selling them, and then buying them when the stock falls and returning them to the lender. The short-seller pockets the difference in price.
Large-scale and professional investors were more critical of the SEC action.
The ban “did more to destroy investor confidence than anything,” said William Ackman, who runs New York-based Pershing Square Capital Management. He denied speculation that short sellers were to blame for causing a slide in stocks this year, and noted the Dow Jones industrials had their two biggest daily point drops ever after the ban was enacted.
The SEC ban was initially set to expire last week. It was extended until 11:59 p.m. EDT today, the third business day after enactment of the federal government's $700 billion financial bailout plan.
The SEC could have kept the ban in place until Oct. 17 but opted not to.
The agency will “take steps as necessary in the public interest to protect market integrity,” SEC spokesman John Nester said Tuesday.