Traders believe that the SEC’s emergency order on short-selling may be responsible for the afternoon market rally today.
Shortly before two this afternoon, the major stock market indexes reversed earlier declines to climb upward sharply. While assigning causation to broad market rallies is usually a fool’s errand, there may be reasons to believe this rally was caused by the SEC.
Brokers began informing customers today that today was the deadline for short sales made after the SEC’s emergency order requiring brokers to close the trade by purchasing the shares if they are unable to deliver borrowed stock within three business days. One prominent online broker sent out the following notice to customers:
“Please be aware that today is the first day that short stock sales transacted after the SEC’s Emergency Order of 2008-09-18 will settle and become subject to hard T+3 close-out if the broker is unable to deliver the stock this afternoon. Your account has been identified as holding a short position as of the 2008-09-18 close and which therefore may be subject to buy in today in order to ensure IB’s compliance with this Order. We are currently in the process of determining what quantity of shares, if any, is available either internally or through third party borrows to meet our settlement obligation and will know that later today. We anticipate sending to you by approximately 12:00 PM Eastern Time a notice of your short positions which we are unable to cover and which will be bought in by IB if you fail to act and close our your short positions in a timely manner.”
If it was a regulatory engineered rally, it already seems to be fading.
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