Friday, 19 September 2008

SEC Shorting Ban Briefly Freezes SKF UltraShort Financials Fund

Incredible news this morning from the SEC. It banned all short selling of financial stocks until 11:59 p.m. on Oct. 2. Trading stopped this morning for the SKF UltraShort ProShares Financials Fund, which I bought Monday and was going to hold for one week, then go long on next Monday's open, as per my signals for my BKX Bank Index trading setup. See last Friday's post for more details and my latest signals table. Don't see much news on this yet anywhere on the web, including the ProShares site - my own broker also doesn't have much info - so I checked out the SEC site.

The SEC says in a statement, "Recent market conditions have made us concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets." No explanation of what standard the SEC uses to determine "sudden and excessive fluctuations" of prices or when a market is or isn't "fair and orderly." I guess in that case the housing-price run-up wasn't excessive, unfair or disorderly, nor was the dot-com bubble and blow-up, crude going from $10 to $140, etc., etc., since there was no intervention then. The SEC goes on, "Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis." Right, so the collapse of AIG, Lehman Bros., Fannie Mae, Freddie Mac, et al., doesn't serve as a "fundamental underlying basis" for concern about the health of financial stocks? Extraordinary stuff. I'm glad again to have limited my position size for this signal as per my risk-control rules so my overall risk is controlled, but I wonder what happens when the SEC ban is lifted. Should be wild.

UPDATE (12:16 p.m.):ProShares has just announced SKF shares can be redeemed, though they may not trade in line with intraday indicative values. See more here.

Signal Update: Just noticed I had left on my latest signals page a bearish signal for copper for next Monday. That signal was based on my old trading setup for copper, which I've recently revised to use an improved combination signal based on two groups of traders. The new setup remains bullish, though this afternoon's data release could change that of course. See more on that new setup in last Friday's post. See you back here after the close with my update based on this afternoon's Commitments of Traders data. Unless they ban that too.

TAGS: ProShares, SKF, BKX, Bank Index, SEC

7 comments:

tony c said...

Alex, Does this event throw out the cots signals from tue. this week on every stock. Tony C

Alex Roslin said...

Hi Tony,

The ban applies only to financials and is described as a temporary, emergency measure. Clearly, we're in a Black Swan type environment, but the ban seems unlikely to be extended to other sectors and may on the plus side work toward stabilizing markets. I'll still go long BKX Monday and will go to cash that market on the short signals for now.

Regards,
Alex

Alexandre said...

Did take a small out of the money call position on Gold based on your hint which complemented nicely my own analysis... Happy camper :=)

Anonymous said...

does this mean that "SKF UltraShort ProShares Financials" was engaged in naked short selling, which was banned by SEC? i guess if they were borrowing stock prior to the short sale, it would be no problem, would it?

Alex Roslin said...

No, that was the subject of the earlier ban during the summer. (Although technically it is still summer, sure as hell doesn't feel like it up here in the Quebec Appalachians!) The new SEC ban today is on all short selling of financials. However, as I pointed out in my update later in the day, SKF resumed trading after a short period and shares can be sold, although new shares can't be created. So I can still get out as per my signal, and as a matter of fact I just put in my order for Monday's open.

Regards,
Alex

Anonymous said...

hi Alex,

what does it mean that new shares can't be created? you can't use this ETF any more in future until the ban is lifted?

Alex Roslin said...

Hi Anonymous,

Not completely sure. Check with ProShares.

Regards,
Alex