21 August 2008

Jury out on US short selling rule

If anyone had a doubt about the wrongheadedness of the US SEC's rule on short selling the jury is out. Check out the evidence, which clearly shows that market in those 19 stocks where the SEC has interfered has become less efficient. See also an update in the Economist: "Phantom Menace" on the subject (subscr. required), which relies on the study. The inefficiency has caused these stocks to decline over 10% points over their peers resulting in a 154 billion dollar loss to its investors according to the study.

But from a broader perspective, it is disturbing when a regulator begins manipulating specific stocks in markets. If it really was a pilot program why only select financial stocks rather than a broad swathe of stocks. While making bad policy is an occupational hazard in the regulator's job, manipulating select stocks and that too with poor outcomes, takes away the moral authority of a regulator from prohibiting others from manipulating stocks.

See my previous posts here and here on short selling.

1 comment:

Kit said...

There is an interesting article in FT on the shortsightedness of this policy. The article gives a historical perspective of shrotselling also. The article can be accessed at http://www.ft.com/cms/s/0/95ccac78-6fb1-11dd-986f-0000779fd18c.html