The end of the Securities and Exchange Commission’s (SEC) short-selling ban at midnight last Wednesday was not a significant cause of the accelerated collapse in US stock prices late last week, according to stock lending research company dataexplorers.com.
On Thursday 8 October, the day after the SEC’s ban was lifted, shares in Morgan Stanley fell by more than 25% to $12.45, while General Motors dropped by more than 30% to $4.76, causing many to lay the blame at the door of short-sellers. Over the entire week, the Dow Jones Industrial Average fell 18%, a larger drop than in any week during the Wall Street Crash of 1929.
“To blame short-selling is to blame the symptoms rather than the cause,” Julian Pittam, managing director, dataexplorers.com, said. “There is much more liquidity on stocks post the ban and they fell just as much as they did before the ban, if not more.”
Figures from dataexplorers.com show that Morgan Stanley’s percentage of market capitalisation on loan (MCOL) only rose from 1.5 to 2% last Thursday, while General Motors increased from 18 to 18.8% over the same 24-hour period. In addition, the benchmarking firm’s new stock lending index (DESLI), which monitors the top 200 stocks from each region by quantity available for lending, showed a slight decrease in the US stocks on loan on the Thursday after the ban. Starting from a base of 100 when the index was established on 1 September, DESLI fell from 127.4 on 8 October to 125.1, when the short-selling ban lapsed.
Although the SEC’s suspension of short-selling applied to 799 stocks from 19 September, General Motors was one of 130 stocks added on 22 September.
“There was a slight uptick in MCOL around the time the ban was lifted and it could possibly have had an impact on General Motors, but I don’t think this was true for Morgan Stanley as the amount of its stock on loan is small,” said Pittam. “Looking at the fundamentals of the companies would be a more accurate argument, for example their ability to fund themselves in the wholesale market and their ability to meet their obligations.”
Although Pittam acknowledged that short-selling coupled with rumour-mongering could force stock values to crash, he also noted the positives that result from short-selling.
“Short-selling cuts out volatility. If a stock becomes over inflated, people tend to short sell it and bring the price back to parity or fair value,” said Pittam. “When the short-sellers believe the floor-limit has been reached on that stock, they buy it back, so it supports the bottom and pushes down prices when they are over-inflated.”
Pittam noted that the ban had put a stop to negative rumours and had allowed regulators time to devise a package to increase market confidence. “But one of the biggest problems for traders is regulatory risk. You can’t hedge or predict regulatory risk and this kind of unpredictability can stall trading,” he said.