Short sales climb in wake of SEC injunction lapse

The latest market data shows the Securities and Exchange Commission’s recent emergency order to prohibit naked short selling has curbed overall short-selling activity, despite mixed messages from other market barometers.

According to analysis by S3 Matching Technologies, an Austin, Texas-based market data provider, short sales – not distinguishing between legal shorts and naked shorts - dropped steadily as a percentage of all trades following the securities regulator’s announcement on July 15 that it intended to impose the injunction, before falling off precipitously on July 21, the day the order took effect.

For the 19 firms covered under the injunction – including the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, and 16 primary dealers – short sales represented 9.41% of all trades on their collective equity on July 15. The following day that number dropped to 8.39% and 6.12% on July 17.

Shorting behaviour almost halved when trading resumed on July 21, with just 3.64% of all orders on the selected equities representing short sales, hitting a low of 2.3% of trades on July 28.

The mean percentage for daily short sales on the covered stocks over the 17 trading days the emergency order was in place was 3.52%. Since then, shorting activity has spiked up, hitting a high of 6.74% of trades on August 14. The mean percentage of orders constituting shorts between August 13 and August 22 was 5.32%.

The results were even starker for the three firms that have grappled with rumours they have been targeted by naked short-sellers seeking to manipulate their share prices in recent months.

Aggregated together, short sales represented 10.4% of all orders on Fannie Mae, Freddie Mac and Lehman Brothers stock on July 15. In keeping with the decline seen for all 19 securities collectively, short orders fell ahead of the imposition of the injunction before plummeting to just 1.34% of trades on the three firms on July 21.

Between July 23 and July 31 short trades represented less than 1% of all orders on the GSEs and Lehman Brothers, with July 29 seeing shorts counting for just 0.28% of orders. The mean percentage of short trades on the three firms during the injunction was just 1.32%, with the average climbing to 4.96% for the eight trading days following the lapse of the order to August 22.

While the decrease might be partly due to seasonal influences, with trade volumes falling in the height of summer, and the possibility that legitimate short sellers have steered clear of the market due to the burdensome stipulation that shares must be borrowed or arranged to be borrowed before any trades on the 19 protected securities could be executed, the analysis appears to confirm that short sales of all kinds fell during the summer.

Other market indicators of the health of the GSEs and Lehman Brothers provide contradictory evidence, however. Short interest, the number of shares that have been sold short but not yet covered, fell for Lehman and Fannie Mae but increased for Freddie Mac during the impostion of the injunction, while equity prices for all three firms have steadily continued to slide, regardless of attempts to curb the activities of supposed short sellers who have been blamed in part for falling share prices.

See also: SEC rule cuts short selling activity