Sometime in the very early hours of Friday morning, the SEC issued an announcement that it has halted short selling of financial stocks effective immediately. The Commission stated that it was acting in concert with the U.K. Financial Services Authority, which took similar action yesterday. The action will apply to the securities of 799 financial companies.
SEC Chairman Christopher Cox said, “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets. The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.”
The SEC further acknowledged that while under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets, at present “it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation. Financial institutions are particularly vulnerable to this crisis of confidence and panic selling because they depend on the confidence of their tradingcounterparties in the conduct of their core business.”
The SEC’s action will terminate at 11:59 p.m. ET on October 2, 2008. The SEC stated that it may extend the order beyond 10 days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.