Shorts Come In From the Cold

Today is the first day that short selling is allowed in 950 financial stocks (originally 799) since the Securities and Exchange Commission imposed a temporary halt three weeks ago.

The stock market is again volatile so far today, and the lifting of the prohibition is being felt in the shares of financial companies. Yes, their shares fell some 22 percent during the ban, but some of them are getting hammered today even when the broader market is somewhat steadier.

The main target is Morgan Stanley, whose chief executive, John Mack, has railed against short sellers as market manipulators and pushed for greater regulation of the practice. In a short sale, investors borrow shares and sell them, betting that the stock price will fall and that they can buy them cheaper, thus profiting from the difference.

Shares of Morgan Stanley tumbled as much as 25 percent this morning, and were down about 16 percent at midday.

"The shorts are focused on this stock again,'' Frederic Ruffy, senior options strategist at WhatsTrading.com, told Bloomberg News.

As Felix Salmon noted earlier, there remains great skepticism in the market place about whether the investment by Mitsubishi UFJ of Japan will close or that even if it does, whether it provides sufficient capital.

And that means that Morgan Stanley is toast, Salmon concludes.