Abusive Short Selling:Abusive Short Selling F.T.Naked’ short-selling rule set to expire
By Joanna Chung in New York
Published: August 10 2008 18:34 | Last updated: August 10 2008 18:34
An emergency measure protecting a select group of financial stocks from abusive short-selling expires on Tuesday, probably leaving at least a two-month gap before a similar rule, currently being considered, is imposed.
The US Securities and Exchange Commission has said that it would not extend the rule preventing “naked” short-selling in shares of 19 key financial entities, including mortgage groups Fannie Mae and Freddie Mac, and big Wall Street firms that include investment bank Lehman Brothers.
EDITOR’S CHOICE
In depth: Short-selling - Jul-17Lex: Short measures - Jul-27Short-sellers caught out by higher costs - Jul-16Lex: Naked shorts - Jul-16Confusion over UK rules on shorting - Jul-06‘No action’ by FSA after abuse probe - Jun-22Instead, its staff is drawing up new proposals to guard against abusive short-selling in shares across the entire market.
However, it is likely to be a couple of weeks before they are proposed, followed by a public comment period of at least 30 days. Several ideas are being studied, including the requirement that is at the heart of the emergency rule.
Short-sellers aim to profit from share declines, usually by borrowing a stock, selling it and buying it back after its price has decreased. In “naked” short-selling, the shares are sold without being borrowed first. The emergency rule requires investors to borrow the security first and deliver at settlement.
The rule slowed down trading, some market participants said, because most traders had to make pre-borrow arrangements manually for the 19 shares. But any new pre-borrow requirement rule, which would involve collecting public comment, is unlikely to be imposed for at least two months, according to SEC officials.
Other ideas, however, could be adopted earlier – at the time proposals are issued – including a requirement to disclose substantial short positions or to use a price test or some kind of “circuit breaker” to limit short-selling when, for instance, shares fall by a certain percentage.
“Given the great differences between all of the companies across the market, a one-size-fits-all approach is unlikely,” one SEC official said.
Nevertheless, market participants say traders might not engage in “naked” short-selling in the intervening weeks.
“A message has been sent and I don’t think we’ll see a return to that,” said one, while another said the emergency measure gave the market a necessary breather. Others say traders can short-sell legitimately through numerous other methods, including using derivatives.
However, some market participants are uneasy. “We remain concerned that during this interim time period our members will continue to be exposed to these “distort and short” campaigns,” said Sarah Miller, senior vice-president of the American Bankers Association.
Ms Miller wants the SEC either to extend the emergency order and include all banks or to issue a proposal as soon as possible.
She said the growing volume of “failures-to-deliver” are indicative of abusive short-selling, and that a spike in FTDs is invariably accompanied by significant stock drops, not all of which can be attributable to market or bank-specific conditions. “We suspect that the volume of FTDs has only continued to grow, perhaps dramatically,” she said.
SEC officials, who are also working on amending some existing rules governing short-selling, are still studying the impact of the emergency rule.