SEC Said to Weigh Two Plans for Short-Selling Limits (Update3)
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By Jesse Westbrook and Edgar Ortega
April 3 (Bloomberg) -- The U.S. Securities and Exchange Commission is considering dictating when traders can bet that stocks will fall, after lawmakers said short-sellers fueled the financial crisis by driving down shares, according to two people familiar with the matter.
The SEC may offer two proposals April 8 that would place more stringent limits on bearish bets than a plan backed by four U.S. stock exchanges, according to the people, who declined to be identified because the proposals remain under discussion at the agency. Since taking over in January, SEC Chairman Mary Schapiro has faced pressure from Congress to reinstate the so- called uptick rule, which required traders to wait for a price increase before executing short sales.
“This is an opportunity to send a clear message that there is a new sheriff in town, that things have changed and that you can once again have faith in investing,” U.S. Senator Ted Kaufman, a Delaware Democrat, said in an interview yesterday. Kaufman is one of six senators who sent a letter to Schapiro dated April 1 urging her to “address abusive short-selling.”
SEC spokesman John Nester declined to comment.
One option under SEC consideration resembles the uptick rule because it would bar investors from betting against a stock until it sold at a higher price than the preceding trade, the people said.
The SEC scrapped the almost 70-year-old provision in July 2007 after agency studies determined the rule wasn’t relevant in markets dominated by fast-paced electronic trading, in which stocks sell at penny increments.
Pricing Changes
“You’ve got stocks where the quote is changing dozens of times per second,” said James Angel, a finance professor at Georgetown University in Washington who has studied short- selling. “The question becomes, will the last trade please stand up.”
The alternative that the SEC’s five commissioners may consider would only allow short sales at prices exceeding the best bid. While the SEC will likely seek public comment on both ideas, the agency’s staff prefers the bid restriction because it may be less obtrusive to markets, one of the people said.
NYSE Euronext, Nasdaq OMX Group Inc., Bats Exchange Inc. and National Stock Exchange Inc., which together handle about 80 percent of the shares traded in the U.S., suggested March 24 that the SEC only impose restrictions on short-selling after a stock has fallen a certain amount, such as 10 percent.
Circuit Breaker
Under the exchanges’ plan, which is known as a circuit breaker, traders would have to execute bearish bets at prices that exceed the current best bid.
The two alternatives the SEC intends to propose would apply to stocks all the time. The agency plans to seek public feedback on circuit breakers and may implement one if investors, brokerages and companies prefer it, the people said.
“This is a way for them to say ‘This is our idea but please tell us what you think so we can consider all views,’” said Edward Johnsen, a partner at Winston & Strawn LLP and a former head of equities compliance at Deutsche Bank Securities Inc. “That’s the right way to go because this is an important rule.”
Brokers already monitor how much traders are willing to pay for stocks, because SEC rules require that firms attempt to provide clients with the best price in securities transactions. |
