WASHINGTON - A THREE-WEEk-OLD ban against betting that financial companies' shares would fall expires on Wednesday night, a move some large-scale investors say could actually help limit the punishment many of those stocks have endured in recent days.

Some market experts say the unprecedented ban on short-selling initiated by regulators - an effort to bolster investor confidence amid the worst financial crisis since the stock market crash of 1929 - did more harm than good at a time of historic market volatility.

'Short selling is very important to our markets,' said Mr Chester Spatt, a former chief economist at the Securities and Exchange Commission, which put the ban into effect Sept 18.

The ban 'isn't a panacea by any means for financial firms.'

Short-sellers bet against a stock. The practice, which is legal and widely used on Wall Street, involves borrowing a company's shares, selling them, and then buying them when the stock falls and returning them to the lender. The short-seller pockets the difference in price.

Large-scale and professional investors were more critical of the SEC action.

The ban 'did more to destroy investor confidence than anything,' said William Ackman, who runs New York-based Pershing Square Capital Management. He denied speculation that short sellers were to blame for causing a slide in stocks this year, and noted the Dow Jones industrials had their two biggest daily point drops ever after the ban was enacted.

The SEC ban was initially set to expire last week. It was extended until 11.59pm EDT Wednesday (11.59am Singapore time, Thursday), the third business day after enactment of the federal government's US$700 billion (S$1 trillion) financial bailout plan.

The SEC could have kept the ban in place until Oct 17 but opted not to.

The agency will 'take steps as necessary in the public interest to protect market integrity,' SEC spokesman John Nester said on Tuesday, adding that he could not comment on the ban's effectiveness because it is still in place.

Mr Spatt said the ban 'was not the course that I would have taken.'

Regulators previously have said that short-selling widened the scope of the financial crisis and contributed to the collapsing values of investment- and commercial-bank stocks in particular - and the demise of Lehman Brothers.

But professional short-sellers argue they were being unfairly targeted by the SEC's prohibition, and some analysts warned of possible negative effects, including further market distortion.

Ackman and other investors say the ban - which started with 799 financial companies but had grown to almost 1,000 firms by Tuesday - hurt their ability to manage their portfolios.

Some say at least part of the recent stock sell-off was attributed to funds, unable to hedge their bets, being forced to unload their long positions.

In the days since the ban took effect, the stock market has been battered. After the bailout plan was rejected in the House last Monday, the Dow Jones industrials lost a record 778 points. A week later, the index experienced its biggest loss ever during a trading day and marked its first close below 10,000 since 2004.

On Wall Street on Tuesday, stocks ended lower for the fifth straight session. The Dow fell 508.39, or 5.1 per cent, to 9,447.11, which represents a drop of more than 14 per cent since the ban took effect.

The short-selling ban has had some unintended consequences, such as disrupting the trading strategies of institutional investors who for years have used short positions to safeguard portfolios, said Mr Nick Perry, equities options analyst at Schaffer's Investment Research.

'The idea behind the ban was to calm everybody down and the immediate response was throwing chaos into the system,' he said.

'The hedge funds that made up a good chunk of the market volume are pulling back because they can't short.'

For instance, a common strategy on Wall Street is the so-called 'pairs trade'.

Hedge funds would routinely go long and short on two correlated stocks like Ford Motor and General Motors, both of which are protected by the ban. If the auto industry tanks, both positions offset each other.

'The ban curtails buying in some stocks,' Mr Perry said. 'You're basically pulling buyer demand out of the market.'

Despite the expiration of the short-selling ban, other SEC actions intended to bolster investor confidence and market transparency remain in place, Mr Nester said. Those include a new rule requiring that short sellers and their broker-dealers deliver securities by the settlement date and impose penalties for failing to do so.

The SEC's recent rules to provide permanent protections against abusive 'naked' short selling - which involves selling shares without actually borrowing them - are constructive, said Mr Spatt, now a finance professor and director of the Centre for Financial Markets at the Tepper School of Business at Carnegie Mellon University.

Moves promoting greater transparency in stock lending also could be helpful, he said.

Naked short-selling should be banned and the SEC should strictly enforce its uptick rule that helps protect companies from excessive shorting, said Mr Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners.

'I've seen plenty of good companies ruined because of naked shorts,' Mr Cardillo said.

The companies covered by the short-selling ban include a who's who of financial giants, including Goldman Sachs, Morgan Stanley, Bank of America, student lender Sallie Mae, Charles Schwab and Berkshire Hathaway. But most of those stocks have fallen in value, along with the broader markets, since the ban went into effect.

'At some point you have to let the normal forces of the market' balance out amid the widening financial crisis, professor of securities law at Columbia University, John Coffee said.

'You can't keep on saying that it's a temporary emergency.' -- AP