mdd posts ramping up in the last several dayz
Looks like a dead cat bounce to me.<g>
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Clock Ticks For Short-Sale Rule
SEC may drop biased trading restrictions
By Cheryl Strauss Einhorn
The SEC is considering dropping its restrictions on short sales of securities.
The rules were implemented in 1938 to prevent stock manipulators from
driving down share prices through short-selling. Proponents of the so-called
short-sale rules have long maintained they are needed to help promote
stock-market stability. But detractors consider the regulations outmoded in
today's increasingly transparent market. Besides, they point out, no
precautions have ever been legislated to rein in manipulators seeking to drive
up prices through similar means.
Although the SEC has put out a concept release seeking comment on the
restrictions from securities-industry participants, Annette Nazareth, head of
the market regulation division, acknowledges the whole subject is up for
grabs. "Personally, I can find no economic basis for the short-sale rule," she
says.
Short-sellers hope to profit by selling borrowed shares that they can buy back
later at lower prices. Under current restrictions, stocks can be shorted only on
an uptick -- that is, at a price above the preceding trade.
While the short-sale rule has remained fundamentally unchanged for the past
62 years, financial markets have changed radically since the 1930s. For
openers, there has been substantial improvement in market surveillance. And
as the volume, velocity and complexity of trading escalate, restrictions on
short-selling "may inject unnecessary inefficiencies" into the market, Nazareth
says.
John Damgard, president of the Futures Industry Association, agrees. "It
makes no sense to prejudice a sale up or down," he says.
The uptick requirement, he adds, just serves "to make people feel warm and
fuzzy, because they like things to go up."
Short-sellers, on the other hand, make other investors feel neither warm nor
fuzzy. Through the years they have often been tarred as naysayers,
doomsdayers and all-around troublemakers who love to gloat when the
market tumbles. Yet there is little data linking their activities to price
movements in the securities markets.
Dan Loeb, a New York hedge-fund manager, would like to see the uptick
restriction abolished because it increases the difficulty of implementing short
sales. Besides, he notes, "Shortsellers provide a service to the market by
increasing liquidity and providing a cap on speculative stocks." While the
evidence in recent years suggests the last is merely wishful thinking, in fact
short-sellers' skepticism sometimes does inject a sorely lacking dose of reality
into phantasmic situations.
Many institutions use short selling as a hedging tool, to protect their stock and
bond portfolios from market declines. Gains in such short positions
theoretically will offset any declines in the value of the firm's portfolio.
Not all market participants want to do away with the short-sale rule,
however. Major brokerages such as Merrill Lynch are conflicted about the
shortsale regulations. While trading desks consider the rules excessively
cumbersome, investment bankers and brokers believe the restrictions will
protect their clients' shares from potential "death spirals," in which stocks are
hammered by repeated waves of selling.
The SEC, according to its concept release, is considering eight different
measures regarding short-sale regulations. In addition to outright elimination,
these include suspending the short-sale rule when a stock or the market rises
above a certain price threshold; providing exceptions for actively traded
securities; focusing shortsale restrictions on certain corporate events, such as
mergers, or trading strategies, such as options expirations; exempting hedging
transactions and revising the definition of "short sale."
The commission, which has received many complaints about short-sale
abuses in the over-the-counter market, also is exploring whether to extend the
rule to non-exchange-listed securities.
The short-sale issue is timely in part because Congress this week is expected
to pass legislation lifting the 1982 ban on trading stock (as opposed to
stockindex) futures. With trading volume in bond and currency futures down
10% this year, the futures business would welcome the opportunity to move
into the equity market. Global competition, too, is propelling the issue
forward. Beginning in January, the London International Financial Futures and
Options Exchange plans to begin trading futures on a handful of U.S. stocks,
including AT&T, Cisco Systems, Citigroup, Exxon Mobil and Merck.
Ironically, if the ban on stock futures is lifted, the short-sale rule could become
moot. Not only are there no ticks in futures, but also short-sellers would not
have to borrow shares to short them. Thus, they wouldn't face having their
shares "bought in," which is what happens in a short squeeze, a form of
market manipulation. Investors then would be able to sell futures on stocks
without cumbersome restrictions or regulatory bias.
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