American Bankers Association Calls On SEC To Probe Short Selling, Abusive Practices

The American Bankers Association, or ABA, reportedly called on federal regulators on Thursday to probe a spate of significant short sales of publicly traded banking stocks that it said were “disconnected from the underlying financial realities.”

What Happened: The group stated it had also observed “extensive social media engagement” about the health of various lenders that was out of step with general industry conditions, reported Reuters, citing a letter written to the Securities and Exchange Commission Chair Gary Gensler.

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“We urge the SEC to consider all its existing tools and to take measures to reduce the avenues for abusive trading practices and restore investor confidence,” the group said. “These measures include, at a minimum, a clear message and appropriate enforcement actions against market manipulation and other abusive short selling practices,” it noted.

The ABA letter comes in the wake of regional bank shares continuing their slide this week following the collapse of First Republic Bank, that became the third U.S. mid-sized lender to fail in two months.

U.S. markets ended in the red on Thursday as concerns regarding the banking sector gained momentum following PacWest Bancorp's (NASDAQ:PACW) move to explore strategic options. PacWest shares closed over 50% lower while Western Alliance Bancorporation (NYSE:WAL) shares lost over 38% on Thursday.

Profits: Short sellers recorded $378.9 million in paper profits on Thursday alone from taking positions against certain regional banks, the report said citing analytics firm Ortex.

Rob Nichols, president and CEO at ABA, told Gensler that short selling could be a legitimate financial tool, but his group was “unalterably opposed to short selling practices that distort the markets through manipulation and abuse.”

Nichols asked Gensler to take necessary enforcement action against market manipulation and other abusive short selling practices, the report said. “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,” he said.

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