(Recasts, adds S3 executive quote, background, byline)
By Emily Chasan
NEW YORK, July 22 Short sells dropped
dramatically in shares of the 19 financial firms targeted by
U.S. regulators' emergency short-selling rule this week, a
market data company said on Tuesday.
Short sells dropped 90 percent in shares of mortgage
finance companies Fannie Mae FNM.N and Freddie Mac FRE.N,
and declined 70 percent in shares of the other 17 financial
firms affected by the rule, S3 Matching Technologies said,
citing a review of data from its clients.
The firm said it compared short sale data from July 14,
prior to the U.S. Securities and Exchange Commission emergency
rule, with data for Monday, July 21 -- the first day the rule
The SEC's rule is part of an effort to clamp down on market
manipulation that some blame for the sharp declines in
financial stocks and the demise of investment bank Bear Stearns
The rule is designed to prevent illegal "naked" short
selling, which occurs when an investor sells stock that has not
yet been borrowed.
It affects Fannie and Freddie and major financial firms
including Citigroup Inc (C.N), Lehman Brothers Holdings Inc
LEH.N, Goldman Sachs (GS.N), Merrill Lynch MER.N, Morgan
Stanley (MS.N) and JPMorgan Chase & Co (JPM.N).
While the SEC said last week that its rule was not
intended to stop legitimate short selling, S3's data showed
that its clients had dramatically altered their strategies.
"The short sell slowdown during the first day was obviously
very significant across the targeted symbols," Jack Holt, chief
executive of S3, said in a statement. "While there is no way
for data to reveal if a short sell is 'naked,' there's no doubt
the SEC has put a rule in place that has drastically reduced
S3 processes data for Wall Street dealers, brokerage houses
and financial institutions of all types, seeing about 15
billion financial transactions per day. It said short sales
represent about 1 percent of its clients' total volume.
Official short selling data is released twice per month by
the exchanges, so firms that process or track trades for
brokerages, like S3, are able to see more current data.
Investors who sell securities "short" profit from betting
stocks will fall. They borrow shares and then sell them,
waiting for the stock to fall so they can buy the shares back
at a lower price, return them to the lender, and pocket the
(Reporting by Emily Chasan; Editing by Tim Dobbyn, Gary Hill)