Hedge Funds May Help Lower Volatility as Short-Selling Ban Ends (Eric Martin and Whitney Kisling)

Created by : Francis Goodwin View profile

Oct. 9 (Bloomberg) -- The end of a three-week ban on short selling financial stocks may reduce the market's record price swings as hedge funds increase trading.

Since the Securities and Exchange Commission started the rule Sept. 19, volume on the New York Stock Exchange dropped 35 percent and the Chicago Board Options Exchange Volatility Index surged to 57.53, its third straight record. Options on the VIX, as the volatility gauge is known, imply it will fall 44 percent in the next two weeks after the rule expired last night.

``Lifting the short ban restores the balance in the marketplace,'' said Peter Sorrentino, a money manager at Huntington Asset Advisors in Cincinnati, which oversees $16.5 billion. ``It should bring liquidity back into the market, which will cap some of the volatility we've seen lately.''

The SEC barred short sales of almost 1,000 finance-related stocks in a bid to curb speculation after the chief executive officers of Lehman Brothers Holdings Inc. and Morgan Stanley accused hedge funds of driving down prices. Companies on the SEC's list slid 18 percent on average during the ban, compared with 24 percent drop for all financial companies in the Standard & Poor's 500 Index.