The Wall Journal reports that the SEC has instituted a 10-day ban on short sales in 799 financial stocks. The ban can be extended to 30 days.
"The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC Chairman Christopher Cox said. "The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress."
The SEC announced other temporary measures, including a requirement for large institutional money managers to report short positions in certain stocks. It also eased restrictions on corporate stock buy backs, saying that will give companies greater flexibility to buy their own shares and help restore liquidity at a time "of unusual and extraordinary market volatility."
In short selling, traders borrow shares of stock and sell them, hoping the price of the shares declines and they can profit by buying them back at a lower price. Short sellers have become scapegoats for the big declines in the share prices of weakened companies including Lehman Brothers Holdings Inc. and American International Group Inc., though it is unclear whether they were the cause of the declines.
An SEC depression era regulation against shorting stocks in a down market was lifted just over a year ago.
COMMISSION ANNOUNCEMENTS
SEC TO END SHORT SALE TICK TEST ON JULY 6, 2007
On June 13, 2007, the Commission voted to remove the tick test of Rule
10a-1 and to amend Regulation SHO to provide that no short sale price
test, including any price test of any exchange or national securities
association, shall apply to short sales in any security. The
Commission has established a compliance date of July 6, 2007 for the
changes. Publication of the amendments is expected to be made in the
Federal Register during the week of July 2, 2007. (Rel. 34-55970)
That regulation was put in place to prevent the possibility that shorts sales could drive the market south, but a one-year pilot program begun in 2004 reassured regulators that the uptick rule was no longer needed.
The Commission adopted Rule 10a-1 in 1938 after several years of considering the effects of short selling in a declining market. Rule 10a-1 provides that, subject to certain exceptions, a security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher that the last different price (zero-plus tick). Short sales are not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions. The operation of these provisions is commonly described as the "tick test." The tick test applies only to listed securities, other than Nasdaq-listed securities, traded on an exchange, or otherwise.
[...]
On July 28, 2004, the Commission issued an order creating a one-year pilot temporarily suspending the tick test and any short sale price test of any exchange or national securities association for certain securities. The pilot was created so that the Commission could study the effectiveness of short sale price tests. The Commission's Office of Economic Analysis and academic researchers provided the Commission with analyses of the empirical data obtained from the pilot. In addition, the Commission held a roundtable to discuss the results of the pilot. The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test.
2004 may not have been the best time to start a pilot program like this, since the market was on the rise. In order to get the full effect you would want to see it operate in a down market, which we have just had the opportunity to see. And what we finally did see is a decision to ban short sales in only certain financial stocks, those affected by the credit crunch. In my view short selling may exacerbate declines in weak stocks but are unlikely to be the cause of falling stock prices or a falling market.
Blaming Wall Street will enjoy bipartisan popularity over the next several weeks as politicians promise to save us all from greedy speculators. But we shouldn't forget that the turmoil had its origins in the sub-prime mortgage market and the practice of lending mortgage money to people who were unable to pay it back. Congress had their opportunities to tighten regulation of Fannie Mae and Freddie Mac, but chose to keep the gravy train going. Wall Street will be the scapegoat -- as usual.
The bans were enacted following the mad cow disease scare that all but crushed the cattle business. http://beepartner.com/2008/05/23/guidelines-for-shaping-strategic-thought-no-6-7/253/nasdaq-national-market/
Posted by: Nasdaq National Market | September 20, 2008 at 12:51 PM