10 Years Ago

It is almost 10 years to the day when  the SEC placed a temporary ban on the short selling of financial stocks.   It was a Friday.  It was 'Quadruple Witching' day.  Monthly options expiration (there were no weekly options back then) ... And the writing was on the all for the financial sector.

The blood was already in the water.  The sharks were circling... and the SEC stepped in to create one of the biggest short squeezes the market has ever seen.

$GS $MS and many other financial stocks soared over 20%!!!!  It fueled a massive market rally that day, however we know it was short lived.  It took 6 more months for the market to finally bottom.


and despite the ban on financials, after the initial sugar high that Friday, financials continued to sell off.


From marketwatch:



The U.S. Securities and Exchange Commission early Friday issued an emergency order temporarily banning short selling in the shares of nearly 800 financial institutions.

The regulator said the move was needed "to protect the integrity and quality of the securities market and strengthen investor confidence," and added it was acting in concert with the U.K.'s Financial Services Authority, which announced a similar ban on Thursday.

The ban, covering a list of 799 stocks, takes effect immediately and runs until midnight on Oct. 2. The SEC said it may extend the order if it's necessary to protect investors, but it won't last more than 30 days. See full list of companies.

Financial stocks soared in early Wall Street trading, with Goldman SachsGS, +0.42% Morgan Stanley MS, +1.59% and Wachovia Corp. WB, +2.18% all jumping more than 20%.

The Dow Jones Industrial Average jumped more than 400 points and the S&P 500 index added more than 50 points.

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Earlier U.K. banking stocks made a similar move, with Barclays (BARC)BCS, -1.05% the bank that is buying part of Lehman Brothers, up around 35%.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," said SEC Chairman Christopher Cox in a statement.

"The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress," he added.

Among other steps being taken, U.S. authorities are putting together a plan to move toxic assets off the balance sheets of major U.S. firms in a bid to find a longer-term solution to the credit crisis. See full story.

The Treasury will also establish a temporary guarantee program to insure the holdings of U.S. money market funds that pay a fee to participate. See full story.

Disclosure requirements strengthened

Alongside the bar on short selling, the SEC introduced other temporary measures requiring institutional money managers to reveal short positions in certain securities and easing restrictions on the ability of securities issuers to re-purchase their own shares.

Allowing companies to more-easily buy back their own shares will help restore liquidity, the regulator argued.

Responding to the initial FSA short selling ban, Daniel Stewart & Co. analyst Justin Bates said the relief rally in shares will only be temporary.

"It provides nothing more than respite, as [banks] still have deficient balance sheets which are in need of recapitalization and indeed they must still go through a painful process of deleveraging," Bates said.

European regulators take action

Following the move from the U.S. and U.K. watchdogs, some other regulators were also beginning to take action Friday.

The Irish regulator said it has banned anyone except market makers from entering a trade with the aim of profiting from a fall in the shares of Irish banks. That move helped drive the main Irish index up more than 14%.

The Australian Securities and Investments Commission also banned naked short selling -- where a stock is sold without making arrangement to borrow it first -- and introduced reporting requirements for other short sales, effective from Monday.

Other regulators didn't change their rules, but indicated they would be taking a tougher stance of monitoring and enforcing them.

The Swiss Federal Bank Commission and SWX Swiss Exchange both issued statements emphasizing that naked short selling is not permitted and contravenes the code of conduct on market abuse.

France's Autorite des Marches Financiers similarly warned anyone selling shares in France that they must deliver the stock within three days and said it will crack down on anyone breaching that rule.

A spokeswoman for Germany's regulator, the BaFin, said short selling is not banned in Germany but declined to comment on the situation for naked short selling or whether it is considering a temporary restriction.

Earlier Friday The Wall Street Journal also reported that large shareholders had already begun to cut back on their lending of shares -- a crucial element of short selling.

Among the investors reigning-in lending is Calpers, the largest U.S. public pension fund, which had stopped lending out shares of Goldman Sachs, Morgan Stanley and Wachovia even before the SEC's announcement.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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