Short selling ban continues to produce unexpected blow ups in various sectors- convertible securities market is one of them...
As reported by WSJ
That could also explain why so many preferred securities in the financial sector have been beaten up so much over the last few weeks.
In convertible arbitrage, short selling -- the sale of borrowed stock -- is not a bet against a particular company's fortunes, but rather an actively managed hedge. The combination of long and short positions is essentially neutral to moves in the underlying stock but will profit from the stock's volatility. The SEC rule banning short sales of financial stocks makes that arbitrage impossible. While most nonfinancial stocks still can be shorted, the effect of the ban is rippling through the entire convertibles market, according to traders and money managers.
The anti-shorting rules are scheduled to expire on Oct. 2, but an extension is widely expected. "At least 75% of investors" in convertible securities hedge their positions, Elliot Bossen, chief investment officer of Chapel Hill, N.C., Silverback Asset Management, wrote in a letter to the SEC and lawmakers Wednesday. "This important source of capital will disappear entirely," if the rules remain in effect, he wrote, adding that the SEC's move "contributed to the seizing up of liquidity in the market for convertible securities."Traders say the impact has been clearly visible in the prices of convertible securities. Typically, when a stock falls, converts fall about one-third as far the common shares. Instead, convertibles on financial names have been suffering big losses compared with the stocks.
According to traders, the convertible preferred securities issued by Bank of America as part of a $6.9 billion capital raise in January have fallen about 9% in value since last Friday, while the bank's stock is down about 6%. Citi's convertible preferreds, also issued in January, are down about 10% while the stock is down 3%...Because of the short-sale rules, "you've got people who are being forced to sell," says mutual-fund manager Edward Silverstein, who oversees the MainStay Convertible Fund.
"Super smart" SEC folks ignored the fact that "Battered financial companies, such as Bank of America Corp. and Citigroup Inc., sold billions of dollars in convertible debt earlier this year. Of the roughly $60 billion in convertible securities issued in the first eight months of this year, 65% was from financials, according to research by analysts now at Barclays Capital"
On the other hand consider this- as we, in the United States moved towards "socialism" by blaming all ills on short sellers, on the other side of the world- China actually decided for the first time in history to allow short sales!!!! What a bazaar change of economic leadership roles
:) http://www.bloomberg.com/apps/news?pid=20601087&sid=a8gUqAR2Smak&refer=home
