SEC to tighten short-selling rules
By John Labate in New York
Financial Times; Sep 26, 2003
US securities regulators are moving ahead with sweeping rule changes governing stock "short-selling".
Annette Nazareth, head of the market regulation division at the US Securities and Exchange Commission, said yesterday that a formal set of rule changes to the legal but sometimes controversial trading practice would be presented for approval in the near future. "We can expect the proposal for short-sale reform will be calendared for Commission consideration in the next few months," she said in an interview yesterday. Ms Nazareth's staff is preparing the proposals but they must still be approved by the SEC's five sitting commissioners. The Financial Times first reported in February that such reforms were being considered.
If adopted, the new rules would bring fundamental change to the way shares are traded across all US stock markets. Short-selling is a legal and often beneficial practice in which a trader borrows shares from another party and then sells them into the market, betting that the share price will go down when he must buy shares in the market at a later date to repay the original loan. If the price of shares does fall, the trader earns a profit.
The new SEC proposals will attempt to standardise short-sale rules across all stock markets in order to keep pace with recent decimal and technology changes. One change will be to replace the "tick rule" at the New York Stock Exchange with a "bid test", in which a seller can only sell shares short at a price above the current price people are willing to buy the shares in the market. The SEC is also expected to launch a pilot programme in which such short-sale restrictions will not apply to a certain number of large, liquid stocks.
Some have complained to regulators in recent years that the practice and current set of rules can be abused. The new SEC rules are expected to include a provision meant to stamp out so-called "naked" short selling. Regulators now consider this to be a persistent problem, especially in the trading of small, thinly-traded company shares that trade in off-exchange markets.
A naked short occurs when shares that were never borrowed are sold illicitly in the market, resulting in steady downward pressure on a company's share price. The seller collects money for the sale but no shares are delivered, since, as critics point out, the current rules do not require delivery to be made. The new proposals will include a rule that requires the delivery of the shares by the settlement date, typically three days after the trade is made. |
