U.S. SEC seen nearing new short-selling rules
10/10/2003 5:39:50 PM
By Kevin Drawbaugh
WASHINGTON, Oct 10 (Reuters) - The U.S. Securities and Exchange Commission is developing new rules for short-selling -- or betting on a stock's price falling -- and may unveil them this month, sources familiar with the matter said on Friday.
After putting the issue on hold two years ago, the SEC was expected to move toward loosening short-sale rules for a few highly liquid stocks and tightening them for other issues more vulnerable to market manipulation.
"The fact that the SEC is coming forward on the short-sale is constructive," said John Giesea, spokesman for the Security Traders Association, a group that represents 7,000 traders.
Short-selling, while perfectly legal, is a risky trading method that has been subject to strict, federal regulation since shorts played a role in the stock market crash of 1929.
A short-seller borrows shares from a broker and then sells them on the market at a price he expects to decline. If the price does fall, the short then buys back the shares, returns them and pockets the difference, minus transaction costs.
Shorts, who have a vested interest in seeing a stock price decline, are the bane of some troubled corporations' existence and are often viciously criticized by chief executives.
"There's this seemingly long-held belief that short-sellers are bad guys ... It's untrue, but that's the belief," said David Tice, a well-known short-seller and investment adviser who heads David W. Tice & Associates.
Shorts and their defenders argue that shorting plays a key role in restraining over-heated markets. Had shorts been freer to ply their trade, some say, the 1999-2000 tech and telecom stock bubble might not have swelled to bursting.
SHORTS SAY MISUNDERSTOOD
"Many people don't understand the place of short-selling in today's markets. It is an integral and ongoing part of it," said Howard Kramer, a partner at the law firm of Schiff Hardin & Waite and a former high-ranking SEC official.
At present, short-sale regulations vary from market to market. The SEC was said to be considering imposing on all markets a Nasdaq-style "bid-test" rule and eliminating a New York Stock Exchange-style "tick-test" rule.
Under present rules, an exchange-traded stock cannot be shorted if its latest price ticker move is down. But since the debut two years ago of stock price decimalization in America, ticker prices often flicker too fast to follow.
The SEC was said to be looking at possibly applying to all markets the Nasdaq "bid-test" rule, which bars shorting a stock whose latest bid is below the previous bid. Such a change could hurt markets presently without a shorting rule, sources said.
Other possible SEC changes said to be under consideration include a test program to lift short-sale restrictions on a number of super-liquid, large-capitalization stocks; stricter margin requirements for shorting and a crackdown on "naked" shorting, or selling short shares not yet borrowed.
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