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SEC Considering 'Market-Wide' Short Sale Rule

by: David Enke August 20, 2008 | about stocks: IVV / IYF / SPY / XLF    

David Enke

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As reported in a Reuters article and elsewhere, the SEC is expected to propose a new short selling rule in the next few weeks that will be broader than the original temporary order that protected 19 financial stocks (17 major Wall Street firms, along with Freddie Mac (FRE) and Fannie Mae (FNM)). SEC Chairman Cox is quoted as saying the proposed rule "will focus on market-wide solutions," implying not only larger breadth, but possible other restrictions or changes affecting the markets that reach beyond just widening the number of stocks and sectors affected.

One possible change is to require investors to publicly disclose large short positions, similar to the current requirements for disclosing large long positions. Whether a more encompassing rule will prop-up the markets longer-term and give some non-financial stocks a boost is difficult to predict. Even with crude oil continuing to sell off, the Financial Select Sector SPDR (XLF) has given back some of its gains and is near short-term, yet technically-weak support. With the S&P 500 having trouble getting above 1,300, and the DJIA having difficulty around the 11,750 level, another SEC-induced short covering rally that is now more inclusive may be just what the market needs short-term to break resistance, even if not the original goal of the SEC.

While potentially beneficial short-term, one can only hope that any new regulation will not have any harmful or unintended consequences for the market long-term. Then again, sometimes hope is all you have to work with.

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This article has 11 comments:

  •  
    Aug 20 04:36 PM
    I seriously hope the SEC can stop naked shorting without messing up the market. It is obvious that naked shorting isnt responsible for the state of the financial sector. But a lot of companies across the board are being destroyed by naked shorting. The SEC never seemed to care about it before, and they surely know that they can't help the banks. So one has to wonder what compels them to act now. I guess they all made enough money?
    Reply
  •  
    Aug 20 05:01 PM
    Naked shorting is a problem and yes it should be dealt with.
    However, lets get to the "real" reason the SEC wants a "broad" short sale rule.

    Behind closed doors they are being told by our corrupt government and our FED to reign in "all" short selling in order to keep the markets afloat. Period. We are in an election year. We cant have the nation being to miserable thanks to the criminals on Wall Street and the greedy bankers who helped to bankrupt the system.

    Anyone who thinks that the SEC is acting in the "best" interest of investors, or acting as if they are trying to do "the right thing" needs to wake up and remember what Wall Street is. A Ponzi, marketing scheme, where once you understand what Wall Street is about, you can do quite well.

    Anything they do that affects the true free market system of our markets is only going to undermine the integrity of those markets and make people less willing to invest in markets they know are corrupt and manipulated.
    Reply
  •  
    Aug 20 09:02 PM
    For those who have been following me, I am no proponent of short selling (naked or not) as I deem it the most non-value adding activity in the market and does not add to creating value/jobs and sustainable value in the long term. I certainly hope that SEC new rules will include disclosure of all short positions, disclosure of long positions lending out their scrips and also a fair mechanism in pricing scrip lending. At least, this way, so called 'legitimate' short sellers building huge positions will be exposed and precious management time of companies will be better utilised entertaining the right people.
    Reply
  •  
    Aug 20 10:57 PM
    I agree with Archman - this SEC action is because they are being told to prop the stock market up at all costs.

    My guess is that it may provide a short lived rally, but longer term the fundamentals of this market are utterly terribly, and it will take alot more govt intervention than this in order to prop them up.
    Reply
  •  
    Aug 21 07:59 AM
    let's hope they put a strict rule in place asap.
    > jack
    Reply
  •  
    Aug 21 08:18 AM
    Disclosure. Disclosure. Disclusure. Any activity that is done in the dark without anyone watching will enable illegal activities- same reason you leave your front porch light on at night; people are less likely to rob you when their actions are illuminated.

    SEC, turn on the lights.
    Reply
  •  
    Aug 21 08:27 AM
    All existing laws on short sales just need to be enforced.

    NO shorts sales without delivery!!!!
    Reply
  •  
    Aug 21 11:53 AM
    Legitimate short sellers fear that a new rule would shut down their activity is completely unfounded. It's a red herring, a smokescreen for the thievery that is naked short selling. It's astounding that just now, after reams of data have been collected by independent groups on the deleterious effects of naked shorting, that the SEC is just now waking up to the financial terrorism wreaked in our markets through this unregulated practice. I'm skeptical; I'll believe such a rule is enacted when I see it. But it can't happen quickly enough.
    Reply
  •  
    Aug 21 03:17 PM
    its about time. enforcing the law, gee what a concept. everybody knows that the hedge funds control the sec and gov. at this point. they are huge pools of unregulated captial that can do anything the want. buy off pols in washington (you better believe it!), pile on small caps and destroy companies. you bet, its called "death by short". not enforcing the naked shorting rule is yet another example of how the gov looks out for the big guys against the little ones.

    but but wait, if the companies didn't have probs already, then the shorts wouldn't be there. look: all companies have probs from time to time. naked shorting causes moral to drop, employees to leave, customers to scratch their heads and say "hmm, i better hold off buying from these guys, they might not be around much long..." etc.
    Reply
  •  
    Aug 22 03:31 PM
    I own two companies common stock that on August 4, 2008 was on the NASDAQ " threshold" securities list. One for 123 days and the other for 355 days. Both firms were on this list on May 8, 2008 when the NASDAQ list was seven pages long.

    I hope that the SEC assesses huge fines against the firms involved in these illegal activities.

    I have suffered losses, on paper, and I hope that the enforcement of the rules against naked short sales will help the share prices to recover.
    Reply
  •  
    Sep 01 02:22 PM
    It seems as though the SEC is catching on and setting some limitations.
    Reply
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