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Bears Boost Bets Via 'Short' Sales

March 22, 2001|TOM PETRUNO | TIMES STAFF WRITER

Wall Street's bears in recent weeks boosted their bets on lower stock prices, driving the number of shares sold "short" on the New York Stock Exchange to a record.

The NYSE said Wednesday that shares of listed companies that were borrowed, sold and not yet replaced rose to 5.02 billion as of March 15, up 164 million, or 3.5% from a month earlier.

Overall, the short sellers appear to have bet correctly: The NYSE composite stock index slumped 8.5% between Feb. 15 and March 15 as the broad market tumbled.

In a short sale, a trader borrows stock from a brokerage and sells it in the open market. The bet is that the stock's price will decline, allowing the trader to buy back the shares at a lower price later to repay the loan.

If the stock indeed falls, the short seller's profit is the difference between the sale price he receives and the price he pays to buy back the shares. If the stock rises, however, a short seller can incur huge losses.

Heavy short selling can contribute to a falling stock market. But a large short position in an individual stock also can be bullish: If the stock rises rather than falls, short sellers may rush to buy back the shares to close out their wrong-way bets--adding fuel to the stock's rally.

Indeed, the number of shares sold short on the NYSE and on the Nasdaq market fell in January as the market rallied and some short sellers bailed out of their bets.

But as the market turned down again in February the bears stepped up their bets on lower prices, at least among NYSE stocks.

Nasdaq will report short interest in its stocks in the next few days.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Bear Bets

The number of New York Stock Exchange shares sold "short"--bets on lower prices--rose to a record in mid-March.

*

Monthly NYSE short-sale totals, in billions of shares

March: 5.0 billion

Source: Bloomberg News

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