UPDATE 2-U.S. SEC extends short-sales test to 2007
Fri Apr 21, 2006 4:02 PM ET
(Recasts with SEC, Gaine comments; adds background, byline)
By Kevin Drawbaugh
WASHINGTON, April 21 (Reuters) - U.S. regulators moved on Friday to extend a test program that makes it easier to sell short about 1,000 heavily traded stocks.
At a time of stepped-up scrutiny of short selling -- or placing a bet that a stock's price will fall -- the U.S. Securities and Exchange Commission delayed until Aug. 6, 2007, the end of a pilot program of relaxed limits on some shorting.
The SEC program that began in May 2005 had been due to expire on April 28. The agency said it will keep the program going for now and avoid the need for markets to reconfigure trading system changes while test results are analyzed.
In a sign of possible future findings, the SEC said: "The staff has found no evidence of market disruption during the pilot thus far, and we do not anticipate that continuing the pilot will trigger any problems in the future."
Short-sellers aim to profit by borrowing shares and selling them at a price they expect to fall. If the price does fall, the short buys back the shares, returns them and pockets the difference as profit, minus transaction and interest costs.
Shorting is legal, but controversial. Executives of companies whose stocks are shorted often complain about it, while hedge funds and other investors that profit by short-selling defend it as a valid investing style.
"It appears the SEC's action reflects an appreciation of the legitimate role of short selling as a market-efficient practice ... a position that the MFA has long held," said Jack Gaine, president of the Managed Funds Association, which represents hedge funds in Washington, D.C.
The pilot program is part of the SEC's Regulation SHO, adopted in June 2004 to standardize short selling rules.
Regulation SHO was partly aimed at cracking down on "naked" shorting and standardizing other rules. But it also took the unusual step of temporarily lifting limits on short selling for a group of large-capitalization, highly liquid stocks.
The pilot program lifts a technical restriction on shorting for about 1,000 stocks during most trading hours.
Extension of the pilot comes at a time of increased SEC scrutiny of short selling and business complaints about it, although the focus of the controversy involves smaller stocks.
The SEC is investigating accusations by Salt Lake City, Utah-based Overstock.com Inc. (OSTK.O: Quote, Profile, Research) that stock-research firm Gradient Analytics Inc., of Scottsdale, Arizona, negatively adjusted research on Overstock after a hedge fund betting against the company's stock requested a change.
Overstock filed a lawsuit last August claiming Gradient and Rocker Partners, a hedge fund run by well-known short-seller David Rocker, were scheming to drive down its stock price.
Separately, the SEC on April 4 charged three former Refco Securities brokers, with scheming to "clobber" the shares of a software company through extensive short-selling.
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