Shorting is good business at the moment. According to MarketWatch, this June was the best month for short sellers in more than 7 years. Then there’s this graph from Alea, of the UltraShort Financials ProShares ETF - a good proxy for the performance of financial shorts this year:
The FT reports today on another wrinkle to bespoil the SEC/FSA crusade against shorts. As anyone worth their salt knows, shorting makes money not just for aggressive hedgies, but for big, conservative, retail-led funds too: the institutions that lend stock to facilitate the shorts in the first place. Boomtime for the shorts is netting them bigger fees. State Street, for example, generated $303m in fees from stock lending this Q1 - a 200% rise on the same period in 2006.
But perhaps the biggest single elephant trap the SEC has blundered into is this:
BOSTON/WASHINGTON, July 17 (Reuters) - US regulators said they would grant some leniency to certain market makers who sell stocks short, responding to pressure from fund managers and brokerages to clarify how new restrictions on the practice would work.
From Greg Newton at Naked Shorts:
The announcement last night that market makers would be exempt from the emergency order “to avoid constraining their provision of liquidity,” essentially castrates the initiative, while raising serious questions about how the agency manoeuvred, or was manoeuvred, into a dunce’s corner.
The problem being that unable to short, market makers and swaps dealers could pull back in a big way. Shorting is necessary for them to hedge their books and allow them to trade with a modicum of safety.
The SEC has opened a can of worms. As Newton notes, most of Wall Street is bewildered by the new rules, with most brokerages not knowing where they stand.
The best thing for all concerned will be for the SEC to let its new regime lapse at sunset: July 29th.
Related links
SEC to grant some leniency on short sales - Reuters
