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The Knock-On Effects Of Banning Short Selling

Here is one small example: two well-known ETFs, the ProShares UltraShort Financials (SKF) and ProShares Short Financials SEF) have been halted. The company will be issuing a statement shortly, but here, I believe, is the problem:

1) these funds do not actually short stocks. They use swaps. Money goes in, they arrange a swap with a counterparty to pay returns to them that are the inverse of the index.

2) With restrictions on the short side, firms either cannot provide the swaps or the price of providing them have increased dramatically (dealers who sell the swaps hedge by shorting).

3) there may be fewer counterparties available (I understand there were four).

There will be other effects from this ban. Stay tuned.

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