© Reuters. FILE PHOTO: Traders work at the post where First Republic Bank stock is traded on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 16, 2023. REUTERS/Brendan McDermid
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By Carolina Mandl, David French and Svea Herbst-Bayliss
NEW YORK (Reuters) -The practice of short selling is coming under increased scrutiny as shares of regional banks remain under pressure, with some calls for more regulatory oversight of the practice.
Short sellers, who borrow shares they expect to fall and hope to repay the loan for less later to pocket the difference, have profited from the banking crisis. They gained $1.2 billion in the first two days of May, analytics firm Ortex said.
Wachtell, Lipton, Rosen & Katz, a law firm that has represented large companies, such as Twitter, in mergers and against attacks from hedge funds, on Thursday called on U.S. securities regulators to restrict short sales of financial institutions.
In a letter to clients, Wachtell said that the Securities and Exchange Commission (SEC) should regulate what it defined as “coordinated short attacks” by imposing a 15-trading day prohibition on short sales of financial institutions.
This would allow time for regulators to act and for investors to digest information, Wachtell’s co-chairman Edward D. Herlihy and partner Matthew M. Guest wrote in the letter, adding that attacks by short sellers are not related to fundamental performance and put the U.S. economy at “great risk.”
The law firm did not specify any stocks that had been subject to such attack. Wachtell did not immediately respond to a Reuters request for comments.
Wachtell’s proposal would revive a ban implemented in 2008. During the financial crisis, short selling was temporarily banned in the U.S., although a New York Federal Reserve review later showed the curb did not achieve the intended effect.
The SEC is “not currently contemplating” a short-selling ban, an agency official said on Wednesday, as worries over bank soundness hit share prices.
The SEC declined to comment on Thursday when asked if it should impose a short selling ban.
However, U.S. officials at the federal and state level are assessing the possibility of “market manipulation” behind big moves in banking share prices in recent days, according to a source familiar with the matter.
SEC Chair Gary Gensler also told Reuters the SEC is focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation or markets more broadly.
Reuters reported last month that many hedge funds secured high gains as First Republic, Silicon Valley Bank (SVB) and Signature Bank (OTC:SBNY) struggled.
While some market participants criticized the practice, others, like non-profit group Better Markets, have said while some do abuse the system, other short sellers warned markets about the challenges regional banks were facing.
“Short sellers act as a check to stock promotions and promotional management teams,” said Sahm Adrangi, who runs hedge fund Kerrisdale Capital, adding “It is a very worthy service we provide to keep financial markets running efficiently.”
The KBW Regional Banking Index is down 30.4% this year and 11.3% this month.