SEC approval on allowing short sales on a declining market
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June 13, 2007, 1:18PM
SEC OKs Changes to Short-Selling Rules
© 2007 The Associated Press
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WASHINGTON â The Securities and Exchange Commission voted Wednesday to abolish long-standing rules that restrict short sales in declining markets and approved another change to tighten rules intended to curb manipulative short sales, including so-called "naked" short sales.
The first change ends decades-long restrictions by the SEC and U.S. markets on selling short as prices are falling. An experiment in lifting the rules for select stocks showed there was little justification for retaining restrictions such as the New York Stock Exchange's "tick" test, SEC Chairman Christopher Cox said.
Elimination of SEC's short-sale price restrictions, and rules barring markets from using a "tick" or "bid" test to control short sales will take effect immediately after the rule change is published in the Federal Register, SEC staffers said.
A second change approved by the SEC modifies Regulation SHO, which the agency adopted in 2004 to curb abusive short sales. The change eliminates a controversial exception to the 2004 rule that shielded existing short positions from requirements to deliver hard-to-borrow shares within 13 days of settlement. Once the change takes effect, short positions previously protected by the grandfather clause must be closed out within 35 days.
Short selling involves sales of borrowed securities, producing profits when prices decline. The practice is legal, but the SEC's Regulation SHO sought to prevent "naked" short sales, in which short sellers don't borrow securities they sell.
SEC officials said delivery failures have declined about 35 percent overall since Regulation SHO took effect and have fallen about 53 percent for hard-to-borrow stocks defined as "threshold" securities.
Long-standing, persistent delivery failures seem to be due to the grandfather protections and a shield for short positions held by option market makers, Cox said. He said delivery failures hurt investors and companies, and may be a sign of naked short selling.
"It continues to be a problem, particularly in the microcap space," Cox told reporters after the SEC meeting.
SEC OKs Changes to Short-Selling Rules
© 2007 The Associated Press
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Print Subscribe NOW
Comments Recommend
WASHINGTON â The Securities and Exchange Commission voted Wednesday to abolish long-standing rules that restrict short sales in declining markets and approved another change to tighten rules intended to curb manipulative short sales, including so-called "naked" short sales.
The first change ends decades-long restrictions by the SEC and U.S. markets on selling short as prices are falling. An experiment in lifting the rules for select stocks showed there was little justification for retaining restrictions such as the New York Stock Exchange's "tick" test, SEC Chairman Christopher Cox said.
Elimination of SEC's short-sale price restrictions, and rules barring markets from using a "tick" or "bid" test to control short sales will take effect immediately after the rule change is published in the Federal Register, SEC staffers said.
A second change approved by the SEC modifies Regulation SHO, which the agency adopted in 2004 to curb abusive short sales. The change eliminates a controversial exception to the 2004 rule that shielded existing short positions from requirements to deliver hard-to-borrow shares within 13 days of settlement. Once the change takes effect, short positions previously protected by the grandfather clause must be closed out within 35 days.
Short selling involves sales of borrowed securities, producing profits when prices decline. The practice is legal, but the SEC's Regulation SHO sought to prevent "naked" short sales, in which short sellers don't borrow securities they sell.
SEC officials said delivery failures have declined about 35 percent overall since Regulation SHO took effect and have fallen about 53 percent for hard-to-borrow stocks defined as "threshold" securities.
Long-standing, persistent delivery failures seem to be due to the grandfather protections and a shield for short positions held by option market makers, Cox said. He said delivery failures hurt investors and companies, and may be a sign of naked short selling.
"It continues to be a problem, particularly in the microcap space," Cox told reporters after the SEC meeting.
What a waste of time, money and resources of countless traders, firms and regulators over these long decades due to a rule that turned out to be totally useless when its perceived benefits were finally measured objectively? Is that too harsh of an assessment as we bury the infamous "uptick rule" for good? Is anybody going to miss the uptick rule or remember it fondly?
Those who don't have to follow it. Lots of products on the street let people circumvent it, but the big funds don't use them, only daytraders... there's somehwat of an edge there, (front running market shots) though not nearly the way there was a few years ago... now you have to actually have some tape reading skill to have a feel if the short will be taken out immediately, etc. It's a great edge when bad news comes out on a stock and everyone has to get short in the market with a huge offer while I can just whack a bid and have a guaranteed out. On reg-sho stocks, everyone just hits bids, instead of having to step down offers... so if it's bad news, you have to grab your nuts and not cover when every idiot out there starts covering his shorts... with the uptick rule, you can just wait until you no longer have a cushion of 40,000 shares. (not that this is fair, it's a stupid gimmick and it's best for the efficiency of financial markets that the SEC is getting rid of this idiotic rule).
According to this article, the new rules will go into effect 60 days after publication in the Federal Register: www.institutionalinvestor.com/Article.aspx?ArticleID=1377545.