Ban on short selling? US regulators, White House raise alarm on misconduct amid banking crisis
1 min read . Updated: 05 May 2023, 07:51 AM IST
PremiumUS federal and state officials have begun to investigate the possibility of market manipulation amid the ongoing banking crisis.
Calls for greater regulatory oversight of short selling practices have grown as regional bank shares continue to be under pressure. Short sellers borrow shares they expect to fall in value and then hope to repay the loan at a lower cost, profiting from the difference. According to analytics firm Ortex, short sellers gained $1.2 billion in the first two days of May.
In the wake of the banking crisis, short sellers have raked in profits as shares of regional banks continue to plummet. US federal and state officials have begun to investigate the possibility of market manipulation behind the significant fluctuations in banking share prices over recent days. The White House has also vowed to monitor "short-selling pressures on healthy banks".
The collapse of First Republic Bank, the third mid-sized US lender to fail in two months, has seen shares of regional banks resume their downward trajectory this week. On May 4 alone, short sellers profited $378.9 million from betting against certain regional banks. The increased short-selling activity and share price volatility have caught the attention of regulators in recent days.
Although the banking sector has sound fundamentals and sufficient capital levels, increased short-selling activity and stock price fluctuations have raised concerns among state and federal officials and regulators. The U.S. Securities and Exchange Commission (SEC) has promised to go after any form of misconduct that might threaten investors or markets.
Ban on short selling?
While short selling is not illegal and considered part of a healthy market, manipulating stock prices is. The SEC defines manipulation as "the intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting stock prices".
Despite worries over bank soundness hitting share prices, the SEC official said on Wednesday that the agency was "not currently contemplating" a short-selling ban. US officials at the federal and state level are, however, looking into the possibility of market manipulation behind the significant fluctuations in banking share prices over recent days.
SEC Chair Gary Gensler told Reuters that the SEC was focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or markets more broadly.
(With Reuters inputs)