The leaders of two of the world’s largest options trading and clearing entities criticized the Securities and Exchange Commission’s emergency ban on short selling scores of financial stocks.
Meanwhile, a University of Chicago Nobel laureate in economics said Sunday he supports what might be the beginning of a growing and global emergency ban on short selling financial stocks.
William Brodsky, the chief executive officer of the Chicago Board Options Exchange, said in a written statement that the ban is “a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace.”
And Wayne Luthringshausen, chairman and CEO of Chicago-based The Options Clearing Corporation, said he understood the need to curb abusive practices but called the SEC order too restrictive.
Luthringshausen said the ban could “harm a marketplace that a great many investors have come to rely on to manage risk in their equity portfolios.”
Both statements were issued late Friday after the SEC banned all short selling in the shares of 799 financial companies until Oct. 2.
SEC Chairman Christopher Cox said the action was necessary to “combat market manipulation that threatens investors and capital markets.”
The CBOE, which is regulated by the SEC, is the nation’s largest options exchange.
But Roger Myerson, a 2007 Nobel winner for mechanism design said he wasn’t surprised at the SEC’s decision.
“We need to think more creatively about ways to allow financial instruments to develop and grow but at the same time, to provide an atmosphere of confidence and trust among market participants,” Myerson told The Associated Press.
Myerson said one indicator that a market is under-regulated is a pattern of expanding trading volume. On Thursday, the Chicago Board Options Exchange posted its second consecutive all-time high in daily trading volume.
And though the SEC exempted from the ban exchange market-makers, traders who trade only their own accounts and provide market liquidity, Brodsky said he was especially concerned with what he called the collateral damage caused by the ban to exchange customers.
Jason Leander, a money manager with Oak Park-based Cunningham Financial Resource Management, said the ban on short selling will hamstring more savvy retail investors by prohibiting them from taking advantage of major slides in the market’s financial sector. Leander said he believes, in the short term, the ban “has and will stop some of the bleeding” in the markets.
But it puts many market players at a strategic disadvantage.
“Let’s face it, the short sellers called the market right,” Leander said.
On Sunday, Dutch Finance Minister Wouter Bos told national broadcaster NOS he has banned “naked” short selling of stock in financial institutions for the next three months to increase the stability of financial markets. Naked short selling entails selling a stock short without first borrowing the shares, as is done in a conventional short sale.
The ban will go into effect Monday.
“Short trading creates a mortal hazard of the worst degree,” Myerson said. “When the volume gets that high, it’s a good indicator that there are problems lurking around the corner.”
Britain and Germany are among other countries that have taken similar measures.