The ban on short selling certain stocks is set to expire tomorrow night, allowing the market to function normally on October 3rd. Rumor, I repeat rumor only, is that the SEC is contemplating extending the ban for another 1 or 2 weeks. The market has responded to the ban as it should have, though not as the SEC intended. Since short selling has been limited by this ban, how has the market dropped by such large amounts? The problem is that the ban has created a buyers' strike.
--- If there are no short sellers, it is easier for prices to move higher. Why wouldn't a buyer wait until short sellers come back to create more supply and move prices lower?
--- Short sellers create a universe of potential buyers.
My guess as to what will happen when he ban is eventually lifted is that most of the stocks will initially move lower. However, if there is demand for the stock, it will move higher (or not drop severely) since buyers will move back in. The companies with dim prospects will continue to move down in rapid fashion.
Please check the blog archive for more comments on the ban.
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