Short Selling

Bearish bets on Nasdaq stocks reached a record high as of mid-September. The number of Nasdaq shares sold "short" -- stock borrowed and sold, usually in a bet that the price will decline -- rose to 7.35 billion as of Sept. 15, up 1.2% from the level in mid-August, the Nasdaq Stock Market said Tuesday. It was the sixth increase in seven months and signaled continued expectations on the part of many traders that the market would head lower.

All last year, Countrywide Financial Corp. Chief Executive Angelo R. Mozilo insisted that the lender would survive the mortgage crunch. If he believed what he was saying, he grossly underestimated the market forces that were driving the company either into bankruptcy or, as happened Friday, into the arms of a deep-pocketed suitor: Bank of America Corp.

The Securities and Exchange Commission on Tuesday stepped up its war against what it believes is manipulation of stocks by "short sellers" -- traders who bet on falling share prices. SEC Chairman Christopher Cox surprised Wall Street with a plan to curb illegal short selling in 19 major financial company shares, including embattled mortgage titans Fannie Mae and Freddie Mac. Shares of Fannie and Freddie have been big targets of bearish traders this year.

The subprime mortgage meltdown has taken a toll on the financial sector, triggering the collapse of one of Wall Street's oldest firms, wild gyrations in the market and a loss of faith by investors in some institutional cornerstones. Yet the most vigorous responses have come from the Federal Reserve and the Treasury Department, not the cop on the beat -- the Securities and Exchange Commission. This month, the SEC appeared to rouse itself from its torpor.

Short sellers pulled back on their bearish bets in major financial stocks late last month, new data show. Whether that had anything to do with the Securities and Exchange Commission's attempt to quash the most aggressive form of shorting in 19 big financial issues, we'll never know. It could just be a coincidence. And in the case of at least one of the 19 stocks -- mortgage titan Freddie Mac -- the shorts were confident enough to keep raising their bets.

Federal regulators today may take their boldest steps yet to curb stock "short sellers" amid rising criticism over the practice of betting on lower stock prices. The Securities and Exchange Commission is expected to announce some kind of temporary ban on short selling, a person familiar with the matter said. The agency late Thursday was said to be considering a number of options, including a ban on shorting all stocks or limiting the ban to financial stocks.

After the collapse of Enron Corp. in 2001, Wall Street "short sellers" were hailed as heroes for helping to expose the company's massive accounting fraud. Seven years later, the "shorts" -- traders who borrow stock and sell it, expecting to profit from falling prices -- are the reviled black hats of global markets.

New York Atty. Gen. Andrew M. Cuomo is broadening his investigation of short selling on Wall Street, according to a senior official in his office. Cuomo is turning to the massive credit default swap market, which he believes may have been manipulated to give the impression that certain companies were in trouble.

Bearish bets on the direction of stock prices hit a record on the New York Stock Exchange this month, even as the market has continued to streak higher. The number of NYSE-listed shares sold "short" climbed to an all-time high of 11.76 billion shares as of May 15, up 7% from 10.99 billion in mid-April, the NYSE said Monday. Short sellers borrow stock, usually from a brokerage's inventory, and sell the shares in the open market.

The volume of shares sold short on the New York Stock Exchange rose 3.8% in the first two weeks of November, the exchange said Wednesday, suggesting an increase in bearish sentiment in the stock market. As of Nov. 15, NYSE short interest rose to about 12.39 billion shares, up from 11.93 billion shares as of Oct. 31, marking the largest increase in short interest since mid-July. Investors who sell securities "short" typically are betting that stocks will fall.