SEC buy-backs eased to counter short-sellers

The Securities and Exchanges Commission (SEC) has had some tough choices to make in the aftermath of last Tuesday’s terrorist outrage. In addition to coping with the decimation of its New York offices at 7 World Trade Center, the SEC has had to grapple with whether or not to impose further short-selling restrictions when the NYSE reopens today.

By the day after the attack, it became clear that the regulator was not going to make any explicit rulings. “We don't want to artificially restrain the market,” said Harvey Pitt, chairman of the SEC. Apart from the immediate tumble in stock prices that kicked-in as the horrific images of Tuesday’s tragedy flashed across dealing room TV screens, it seems that a subsequent gentleman’s agreement between traders to refrain from aggressive activity has so far prevented equity markets from going into a full-on freefall.

However, federal regulators are aware that short-sellers may send already bearish markets plummeting and are gambling that temporarily easing buyback restrictions will prove a supportive measure. Usually, corporations are prevented from trading more than a specified daily volume of their own stock. The SEC hopes that by relaxing usual limits, stock prices can be supported and cash pumped into the system – ensuring liquidity. Buybacks are critical to market stability, according to Michael Oxley, chairman of the House Financial Services Committee. Many corporates have already pledged to enter into large buybacks. For example, Cisco Systems said last Thursday that it plans to buyback up to $3 billion worth of stock.

These have been trying times for equity options traders as well. Many traders had hoped that because of the four-day options market closure last week, authorities would extend the September options expiration cycle. But hopes were to be quashed. Last Friday, the Options Clearing Corporation – the organisation responsible for processing and clearing options traded on the US’ options exchanges – confirmed that the expiration date for equity and index options will remain Friday September 22. The OCC’s statement simply said that it “has no authority to extend options expirations". So despite the cessation of trading, September options continued to lose time value. When the opening bell chimes this morning to signal that the NYSE is back in business, equity options will have four days’ time decay priced in.

Back in the equity markets, the sheer scale and ferocity of the terrorist attack seems to have galvanised market opinion. It is expected that hedge funds and other short-sellers will find resistance, irrespective of regulation. By last Friday, US pension funds were asserting their intention to support the markets. Representatives from the National Association of State Retirement Administrators – a coalition of some of the largest US pension funds – said that they would buy stocks, should the short-sellers strike. Whether such action can counter hedge fund activity remains to be seen. But the Nikkei’s 5.04% tumble to close at 9504.41 – a seventeen year low – does not instil much optimism.