Exchanges in disarray over short sale curbs
Wed May 13, 2009 8:19pm EDT
By Rachelle Younglai and Jonathan Spicer
NEW YORK (Reuters) - Major exchanges disagreed on how and whether U.S. regulators should clamp down on short selling, which has been blamed for worsening the financial crisis by driving down stock prices.
Speaking at the Reuters Exchanges and Trading Summit in New York, the largest exchanges broke rank on whether additional rules were needed to restrict short selling -- a legal trading strategy that profits on a stock's decline.
"Messing with market structure is not the way to go," said William O'Brien, the chief executive of Direct Edge, an electronic stock trading platform.
"We are quite critical of others of really pandering to their issuer community (companies listed on their exchanges)," he said.
Amid Congressional pressure, the Securities and Exchange Commission proposed restrictions that would apply to all stocks and a series of circuit breakers that would be triggered when a stock dropped more than 10 percent.
Some of the major U.S. exchanges were initially united on how the SEC should protect companies from aggressive short selling, but have since parted ways.
Duncan Niederauer, the head of NYSE Euronext (NYX.PA: Quote, Profile, Research, Stock Buzz)(NYX.N: Quote, Profile, Research, Stock Buzz), said he favored a rule that would be applied at all times. One of the SEC's proposals known as a modified uptick rule or price test would only allow shorting if the last bid was higher than the previous one.
The SEC is also considering an updated version of the uptick rule, which would only allow an investor to short the stock if the last sale price was higher than the previous one.
"We and most of our constituents think (the price test) should be applied all of the time, not just some of the time," Niederauer told Reuters Television during the Summit.
The chief executive of Nasdaq OMX (NDAQ.O: Quote, Profile, Research, Stock Buzz), Robert Greifeld, said he would recommend the SEC adopt a circuit breaker that would trigger a price test.
The third largest U.S. stock exchange, BATS Exchange, does not want the SEC to do anything. The head of Toronto Stock Exchange operator, TMX Group Inc (X.TO: Quote, Profile, Research, Stock Buzz) cautioned against further reforms. "I think the market is well regulated in that respect," TMX Group CEO Thomas Kloet said at the summit.
Late in March, the operators of the New York Stock Exchange, the Nasdaq Stock Market and BATS Exchange sent a letter to the SEC recommending a circuit breaker that would trigger the application of a modified price test.
But BATS Chief Executive Joe Ratterman suggested that the SEC forced the exchanges to produce a recommendation and said he did not like the SEC's current proposals.
Ratterman said the SEC should focus on an abusive form of short selling, called naked short selling, and said those who engage in illegal activity such as market manipulation and the spread of false rumors should be put "in handcuffs."
"I think those people should be arrested and shown that someone is cracking down on the bad behavior," he said. "The price test is the wrong place to look." (bolded for emphasis)
The uptick rule was repealed in 2007 after the SEC found that advances in trading and technology rendered it ineffective. But some lawmakers, investors and market experts say the SEC made a mistake and should revive the decades-old rule.
In a short sale, an investor borrows stock and sells it in the hope that its price will fall. If the price does drop, the seller profits by buying the stock back at the lower price.
reuters.com |
