selling of the two combatants - First Bank System Inc. and Wells Fargo & Co.. First Bank's short position rose 48%, by 1.9 million shares, to 5.8 million, in the month ended Nov. 15. It was the largest increase in number of short shares among banking stocks traded on the New York and American stock exchanges. Wells, starting from a much lower short level, jumped 154%, by 625,455 shares, to 1.6 million - the second-largest percent increase in the group. Short interest is the outstanding volume of shares sold short - that is, borrowed and promptly sold. Traditionally, short selling is a bet that a company's share price will fall, enabling the short-seller to cover his position profitably with cheaper shares. But the short position in Wells and First Bank do not necessarily reflect pessimism, because short selling has also become a hedging tool used by arbitrageurs seeking to profit from mergers. Increasingly, arbitragers have shorted shares in acquirers while buying shares in their targets to lock in profits. The strategy has inflated short positions in many banks that have announced merger plans, even though investors may remain bullish about the banks' prospects. Given the controversy swirling around First Bank's agreement to buy First Interstate, it is difficult to say with any certainty whether the short selling represents a negative opinion or a hedge strategy, analsyts said. "This is something that has no clear picture to it," said George Salem, of Gerard Klauer Mattison & Co., in New York. "It's a huge battle among strong-willed and deep-pocketed people." He added, however, that arbitrage probably is a greater factor than negative sentiment in the rise in First Bank's short position. Actually, while the figures show relatively big percentage jumps, the short positions in both companies remain relatively small in real terms. For instance, the short position in Wells equals only 4.6 days of average trading volume, while First Bank's short position represents only seven days of trading. In contrast, it would take 52.1 days of trading to cover PNC Bank Corp.'s short position, the largest in the industry for several months. Short selling of PNC's shares has been attributed to arbitrage on its pending acquistion of Midlantic Corp. First Interstate's short position remained negligable, possibly indicating that the market is confident the company's shares will continue to command their current price, which has been boosted by the bidding war. The short position in the Los Angeles bank declined 186,686 shares to 766,714, representing less than one day's trading volume.

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