From the September 01, 2009 issue of Futures Magazine • Subscribe!

SEC curbs short selling

On July 27, the Securities and Exchange Commission (SEC) announced rules to curb abusive short selling. The agency made permanent Rule 204T, now called Rule 204, which requires broker-dealers to purchase or borrow securities to deliver on a short sale. The new rule imposes penalties if a clearing firm does not purchase or borrow shares to close out a “fail to deliver” resulting from a short sale in an equity security by no later than the beginning of trading on the day after the first fail occurs. The SEC also is working to make more short sale volume and transaction data public.

Experts say that the SEC’s latest measures are much more reasoned and effective than its emergency ban on short sales in the financial sector in September 2008.

The emergency ban had a negative impact on liquidity, according to Peter Bottini, executive vice president of trading at optionsXpress. However, he says this time around, the SEC took more care with their rule-making process.

“The movement on short sales has become heavily politicized and the SEC seems to be pushing their decision through a very long process. The SEC understands that the data doesn’t support removing short selling from the marketplace,” Bottini says.

Adam Sussman, director of research for Tabb Group, says the SEC’s new measures “[haven’t] really had a significant impact. They have slightly increased the cost of borrowing stocks, but not to the point where it is impacting investing decisions. It’s having the desired effect with limited unintended consequences.”

Bottini says Rule 204 “takes a further step to make the delivery process a little bit stricter and it should curtail some more of the abusive short
selling practices.”

The SEC will hold a roundtable on Sept. 30 on securities lending and possible additional short sale disclosures.

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