Markets

SEC Halts Short-Selling in 799 Financial Stocks

CNBC.com
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The Securities and Exchange Commission temporarily banned short-selling on 799 financial stocks to boost investor confidence on Friday, one day after the UK Financial Services Authority took a similar step.

Kathy Willens

The measure ignited big rallies in financial stocks Friday that have been the target by sellers as the credit crisis worsened.

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

"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," Cox said.

The SEC’s emergency order will be effective immediately and will terminate at 11:59 p.m. New York time on Oct. 2, 2008, the Commission said in a statement.

Cox has been under fire for not acting to control the practice that had led to sharp declines in U.S. and European financial stocks since the onset of the credit crunch.

The order may be extended beyond 10 days if the SEC deems an extension necessary in the public interest and for the protection of investors, but the order will not be extended for more than 30 calendar days in total duration, the agency said.

French regulator AMF said it was also talking to other Eurozone regulators about market dealings, leading to expectations that the ban would snowball.

The decision is positive for stocks, analysts said.

"Obviously, the ability not to short will decrease the selling pressure so this is definitely a buying opportunity, but for the short term," Dodge Dorland, Chief Investment Officer at Landor Capital Management, told "Worldwide Exchange."

The SEC order followed a formal SEC meeting Thursday night and a separate extraordinary meeting that Cox and other senior officials attended in the Capitol building the same evening. Senior administration officials asked Congressional leaders for additional authority to soothe turbulent capital markets.

Treasury Secretary Hank Paulson briefed Congressional leaders on plans to address the "illiquid assets" on U.S. financial institutions' balance sheets, possibly including the creation of a government facility to take on financial firms' bad debts, CNBC reported on Thursday.

The proposal to create a massive facility to buy mortgage-backed securities could cost as much as $500 billion and would involve the purchase of both private-label and government-guaranteed mortgages, an administration official told CNBC.

Short-selling involves an investor selling stock in anticipation the price will fall -- in which case the investor can buy the stock back at a lower price. Such a strategy is usually coupled with borrowing the stock that's being sold from an institutional investor such as a pension fund.

The U.S. short-selling ban includes commercial banks, insurers and the two remaining big investment banks Goldman Sachs Group and Morgan Stanley .

Morgan Stanley shares soared 29 percent to $29.11 in early trading, while Goldman jumped 27 percent to $137.55. The S&P financial index shot up 12.5 percent.

-Reuters contributed to this report.