|Bad News Bears?|
|By Staff and Wire Reports|
|Wednesday, 24 February 2010 08:21|
Federal regulators are poised to rein in the practice of short-selling, restoring Depression-era restraints, in a bid to prevent stock-selling sprees that feed on themselves and can heighten market turmoil.
Bloomberg reports that a majority of the SEC’s five commissioners will vote today to temporarily restrict short sales of a company’s shares once it falls 10 percent, according to two people with direct knowledge of the rule. When the 10 percent threshold is triggered, traders could only execute short sales for the stock at a price above the market’s best bid, said the people, who declined to be identified before the decision.The meeting begins at 10:00 a.m. EST.
The Associated Press is reporting that commissioners are expected to adopt the so-called circuit breaker for stock prices, restricting short-selling of an extremely fast-dropping stock for the rest of a trading session based on its highest bid.
Short-sellers bet against a stock, in a practice that is legal and widely used on Wall Street. They generally borrow a company's shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.
In July 2007, when the stock market was near its peak, the SEC abolished a 70-year-old uptick rule, put in during the Depression that followed the 1929 market crash that allowed short-sellers to come in only at a price above the highest current bid for the stock. Investor confidence was shaken as the market plunged in the fall of 2008 and proponents of restoring restraints said they were needed to prevent abusive trading. They maintained that the absence of the rule fanned market volatility, prompting bands of hedge funds and other aggressive investors to target weak companies with an avalanche of short-selling.
But opponents said new restrictions could eliminate the benefits of short-selling — bringing capital into the markets and accurate stock prices to the surface — and actually hurt investor confidence.
Last July, the SEC made permanent an emergency rule enacted at the height of the fall 2008 tumult that targets so-called "naked" short-selling — when sellers don't even borrow the shares before selling them, and look to cover positions after the sale.
The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.