Short Selling Ban Extended Conditionally
October 2, 2008
SAN DIEGO (ETFguide.com) - The Dow Jones (AMEX: DIA) recorded its biggest single day drop earlier this week on Monday. For today, the Dow and S&P 500 (AMEX: SPY) are on target to record another steep, triple digit loss. What else can the markets do to show lawmakers that the ban on short selling isn't working?
The short selling ban on 800 or so stocks (mostly financials) has been in force for nine (trading) days, three of those have seen declines of more than 200 points in the Dow. The perception is that banning short selling (especially naked short selling) would reduce the downside pressure for these stocks. However, there are always two parties to a transaction.
There's the seller and there's the buyer. By temporarily eliminating short sellers, the SEC has done a fine job of creating a rigged marketplace. Congratulations Chairman Cox are you satisfied with the results?
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Not suprisingly, the SEC has decided to extend the ban on short selling financial stocks until October 17. If the bailout plan is approved by the House Of Representatives, the ban will sunset three days after the bill passes. The package was approved by the Senate on Wednesday evening and is slated to be presented to Congress on Friday.
The ban on short selling has wreaked havoc on short ETFs, in particular short financial ETFs. Most notably affected was the $4.2 billion ProShares UltraShort Financials ETF (AMEX: SKF) and ProShares Short Financials ETF (AMEX: SEF). Often overlooked is the Rydex Inverse 2x S&P Select Sector SPDR ETF (AMEX: RFN).
Blind-sided by the abrupt SEC action, SKF and SEF halted trading briefly last Friday to figure out the next course of action. ETF Providers were able to redeem but not able to create new ETF shares. For more details please read "Ignoring SKF Tipping-Point, SEC Slams Free Market" or "Why Two Financial Short ETFs Stopped Trading," both published by ETFguide.com.
Aping the SEC, regulators from Germany, Great Britain, Italy, The Netherlands, Switzerland, Hong-Kong, Taiwan, South Korea, Indonesia and the Phillipines issued their own broken versions of bans on short selling.
The short sale ban on foreign shares is likely to complicate matters for other ETFs like the UltraShort MSCI EAFE ProShares (AMEX: EFU) and the UltraShort FTSE/Xinhua China 25 ProShares (AMEX: FXP). Each of these funds is designed to increase in value when their underlying stocks fall.
Long ETFs tracking the above countries are as follows:
Germany: iShares MSCI Germany (NYSEarca: EWG), NETS DAX (AMEX: DAX)
United Kingdom: iShares MSCI United Kingdom (NYSEarca: EWU), NETS FTSE 100 (LDN)
Netherlands: iShares MSCI Netherlands (NYSEarca: EWN), NETS AEX (NYSEarca: AEX)
Switzerland: iShares MSCI Switzerland (NYSEarca: EWL)
iShares MSCI Italy (NYSEarca: EWI), NETS S&P/MIB (AMEX: ITL)
iShares MSCI Hong Kong (NYSEarca: EWH), NETS Hang Seng (NYSEarca: HKG)
South Korea: iShares MSCI South Korea (NYSEarca: EWY)
