*US SEC repeals outdated short-selling rule*
Wed Jun 13, 2007 4:37PM EDT
By Rachelle Younglai
WASHINGTON, June 13 (Reuters) - The U.S. Securities and Exchange Commission on Wednesday eliminated an antiquated short-selling rule and approved changing others to stem abusive short selling practices.
The five commissioners unanimously voted to drop a short selling limit, also known as the tick test or Rule 10A-1.
The tick test only allows short sales when the last sale price is higher than the previous price. That means a trader cannot short a stock if the movement prior to the short sale is down.
The rule, adopted a decade after the 1929 stock market crash, was designed to prevent short sellers from adding to the downward pressure on a stock that is already falling sharply.
But the commissioners said the rule was obsolete as new trading and pricing systems evolved.
"It's a historic day at the commission," Republican commissioner Paul Atkins said. "We are eliminating rule 10A-1 today because we have determined it is simply not needed."
SEC Chairman Christopher Cox said decimalization and changes in trading strategies undermined the effectiveness of the tick test, while increased market transparency lessened the need for it.
The commission tested that theory through a pilot program that suspended all short sale price tests for a select group of more than 1,000 equity securities.
Short sellers borrow shares they see as over-valued, sell them and wait for the price to fall. If it does, they buy back the shares, return them and pocket the profit
Separately, the SEC voted 5-0 to change certain trading rules to reduce the amount of "failure to deliver" in certain securities.
The agency eliminated a provision that protected certain short positions from requirements to deliver shares within 13 days of settlement.
But the commissioners delayed voting on a Regulation M rule that would halt short selling before a public stock offering, which can be vulnerable to price manipulation schemes. Cox said commissioners would consider it at their next open meeting.
"It's a drafting detail to make sure we don't have any unintended consequences," he told reporters after the meeting.
Rule 105 of the regulation prohibits a trader who shorts stock prior to an offering from covering that short sale using securities that were purchased in the offering during a defined period. It was designed to prevent manipulative activity that can artificially depress market prices, and reduce offering proceeds.
However, because the secondary offerings are usually priced below the value of shares already on the market, it is possible to make a profit by shorting the old shares and covering the position with the new cheaper shares obtained in the new offering.
The proposed rule would prohibit a person who shorts stock prior to a secondary offering from buying any securities in the offering. |
