(Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)
- A leading banking group called for the SEC to do more to stop speculative short selling in bank stocks.
- The American Bankers Association said social-media speculation about banks was disconnected from their financial reality.
- Short sellers made nearly $400 million in a single day by betting against regional banks.
A leading banking group has called for regulators to step in and halt a wave of short selling in the stocks of US regional lenders, a trend it suggested was driven by social-media speculation.
In a letter to the Securities and Exchange Commission (SEC), the American Bankers Association (ABA) urged the market watchdog to do more to stop harmful short bets that were disconnected from the banks' financial realities.
Short sellers have piled into bank stocks since the collapse of Silicon Valley Bank in March, selling borrowed securities with an aim to buy them back once the share prices fall. The trend has gathered momentum following the failure of First Republic over the weekend.
"Since the two bank failures in March, some of our members have experienced significant short sales of their publicly traded equity securities that do not appear to reflect the issuers' financial status or general industry conditions," ABA's CEO Rob Nichols wrote.
"We have also observed extensive social media engagement about the health of various banks and the sector generally that appears disconnected from the underlying financial realities."
Traders pocketed $378.9 billion during the Thursday session betting against PacWest, Western Alliance and First Horizon, according to ORTEX data reported by Reuters. Each of the banks' shares fell around 40% on the day.
Nichols said the ABA recognised that short selling could be a legitimate and important financial tool.
"ABA is, however, unalterably opposed to short selling practices that distort the markets through manipulation and abuse," he said.
Nichols called for the SEC to take a clearer stance against what he called market manipulation and abusive short selling practices.
"The harm caused by short selling that runs counter to economic fundamentals ultimately falls on small investors, who see value destroyed by others' predatory behavior."
The SEC didn't immediately respond to Insider's request for comment.