The day after the Securities and Exchange Commission's late-July ban on naked short sales of 19 financial stocks lapsed, the sector took a dive, making it easy to conclude that short selling had roared back.

But it is hard to isolate the impact of the ban because so many other influences were evident during those three weeks — from the government's moves to shore up Fannie Mae and Freddie Mac to IndyMac's failure and Merrill Lynch & Co.'s decision to sell $30.6 billion of collateralized debt obligations for 22 cents on the dollar.

There was "a lot of noise" making it "hard to separate" the ban's effect, said Sally Miller, a senior vice president in government relations at the American Bankers Association, which has pressed the SEC to make the ban permanent and extend it to more banks.

Trading in the 19 companies — which included the three largest commercial banks, several foreign banks, and the biggest investment banks, as well as Fannie and Freddie — was cut in half after July 21 when the SEC ban took effect, according to S3 Matching Technologies, an Austin data company that processes trading data for major brokerages.

John Standerfer, the vice president of financial services at S3, said the data "clearly shows there is less interest in shorting."

But he did not think the SEC ban was the sole determinant.

"It could be that people feel the opportunity to short isn't there like it once was," he said in an interview Thursday. "There has been more going on in recent weeks beyond just the implementation of the rule."

S3 found that short selling made up 5.4% of all transactions in the 19 companies' stocks on Aug. 13, the day after the SEC ban expired, and 6.7% of Thursday's trades. Short selling's share rarely topped 4% while the ban was in place from July 21 to Aug. 12; short sales made up 9.4% of all transactions on July 15, the day the SEC announced it would impose the ban.

The data does not break out naked short selling, the term for an investor's shorting a stock without first borrowing the shares.

But the S3 data does back up anecdotal evidence from bank traders and other market observers, who say short sellers are returning to the market and could do so more fiercely should bank stocks post another rally akin to that of late July after second-quarter earnings came out.

Michael O'Boyle, an investment banker at Sterne Agee & Leach Co., said shorting was slow last week "as everyone gets a sense of the new realities of the practice" while gauging whether the SEC will follow up its emergency rule with something more permanent.

"I think the rule will have a short-term effect," he said. "Short selling is just another way for money managers and asset managers to handle risk."

Observers said short sellers may be more reserved coming out of the gate because shares of the 19 protected companies did not make substantial gains while insulated by the SEC, making shorting riskier.

Stocks of those companies, including New York's Citigroup Inc. and JPMorgan Chase & Co. and Bank of America Corp. in Charlotte, collectively lost 3% during the period covered by the rule.

The picture gets cloudier when broken down by bank. Last Wednesday, shorting of Bank of America stock reached its lowest point in a month, at 3.5% of all trades, compared to a high of 9.1% on one day during the SEC ban. On Thursday, shorting of B of A's shares hit 6.9%.

Shorting activity on Citi stock was higher in the closing days of the ban than on the days after its lapse.

About 6.6% of all trades in JPMorgan stock last Wednesday involved short sales, but shorting reached 8.5% on Thursday. The New York company had warned last Monday in a quarterly filing with the SEC that it could have $1.5 billion in writedowns of mortgage-backed assets.

An analyst who asked not to be identified said Thursday that, based on his recent conversations with hedge fund managers, it might be difficult to compare short selling in individual banking companies. "It gets a little more scattershot when you look at the banks," he said, though his understanding was that many investors are simply waiting for the right time to resume shorting shares of certain stocks.

"Hedge funds believe that Citi still remains vulnerable," the analyst said, "but even people who are bearish on the sector still expect the market to give JPMorgan Chase the benefit of the doubt." The picture for B of A is murkier, he said, with investors divided on how credit quality will shake out, given the company's exposure to credit cards and its July 1 purchase of the mortgage lender Countrywide Financial Corp.

Anthony Conroy, the head trader at Bank of New York Mellon Corp.'s BNY ConvergEx Group, said Merrill's dumping of CDOs may ward off some shorting, which in some cases had been based on fears that its CDOs were worthless. "Their decision to write CDOs down to 22 cents on the dollar gave investors a concrete number," he said in an interview Thursday. The SEC ban seemed a "quick fix to stem the tide," he said, and shorting is unlikely to return to the high volumes seen in mid-July.

Ms. Miller of the ABA said she is concerned that short selling will pick up again once investors return to the pre-ban standards.

"We understand that traders had to manually police themselves to make sure they didn't naked short the 19 names," she said, "so it may have been easier for them not to short any stocks."

Originally published in American Banker.