SEC says short-selling not responsible for stock market tumble

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The conspiracy theorists have been arguing for month that aggressive short-selling and illegal naked short selling played a significant role in the financial collapse.

Bad news: The data just doesn't back that up.


A new study from the SEC's Office of Economic Analysis concluded that it was long-sellers who were doing most of the selling as stocks declined. Shorts were actually more active when stocks were rising. The Wall Street Journal reports that "Credit Suisse found the ban made stock pricing less efficient, which in turn can make buying or selling a stock more costly for investors. The firm's data showed the difference between prices at which banned stocks could be bought and sold, the bid and asked prices, doubled during the ban. After the ban was lifted and short selling slowly resumed, spreads fell back to about 65% above preprohibition levels the third week of October."

Of course that makes perfect sense: Short sellers wouldn't be able to make money selling stock after it tanks -- they can only profit by selling high and then buying low.

To summarize: Short sellers weren't the problem and scape goating them not only distracted from solving the actual problems in the financial markets but also created a whole new set of problems.

Gary Weiss chimes in that "It will take some courage for the SEC to face down the political pressure to act against shorts--and courage is a commodity in short supply under SEC chairperson Mary Schapiro."

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Last updated: March 19, 2010: 03:36 AM

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