Short Sale Ban Expiring

The SEC's temporary ban on short selling expires Wednesday. It was an interesting attempt to assuage political concerns that short selling was driving down the market, but it was misdirected and ineffective.

Short sellers actually have been bringing downside stability (or rather, tightening the range of the downside moves) to the market, with many covering intraday or at key levels in stocks. We have a distinct lack of demand to invest in the stock market, brought on by the looming danger in the devaluation of mortgage-backed securities and the subsequent tightening of credit issuance by the banking sector. If short selling was truly driving down the market, then value/fundamental buyers would rather be excited to get stock at "cheap" prices.

Instead, what we have been seeing while the ban was enacted has been a lack of breadth on the upside, and distinctly powerful down moves. Bear in mind that some of our greatest down days thus far has been while the ban was enacted.

At a deeper level, I believe further research into the activity of the past few weeks is warranted. The short sale ban effectively caused equity funds who were short to likely stay short, and those who weren't to be unable to get short. In essence, it delevered the "short-side" volatility, and displayed only the "sell-side" volatility.

We'll see what happens, but I believe that volatility may increase a dramatic amount, and not necessarily to the downside.