Short selling and the SEC

June 23, 2009

The subject of short selling can always be counted on to generate a lot of heat. And a proposed Securities and Exchange Commission rule that would put limits on the ability to short a stock–especially in a severe market downturn–is no different.

In all, some 3,700 people submitted comments to the SEC, which officially stopped taking public input on the proposal on June 19. (The comments, however, are still coming in).

And that doesn’t include the 5,000 people, who signed a petition drafted by Jim Cramer, the CNBC television personality and founder of Cramer and his many friends strongly support the SEC proposal to reinstate the ”uptick rule,” which would prevent traders from shorting a stock on downward movement in price.

Not suprisingly, the vast majority of comments are from individual investors who favor limits on short selling. The industry, for the most part, is opposed to the SEC proposal.

This comment from Goldman Sachs pretty much sums up Wall Street’s view:

While we share the Commission’s interest in restoring investor confidence, we do not think that the available evidence demonstrates that short selling caused last fallt’s severe price declines or supports the need for new short sale practices.

I think short sellers were wrongly accused for fueling the flames last year and hastening the collapse of Bear Stearns and Lehman Brothers. While the shorts no doubt made giant profits by betting against those firms, the investment banks ultimately collapsed because of their own recklessness. No short seller forced Bear and Lehman to lever their themselves 30 to 1. And no one forced the investment banks to use short-term overnight borrowings to finance investments in longer dated risky real estate-related assets.

So the SEC proposal for instituting a market circuit breaker, which would limit trading in a stock that declines too sharply, strikes me as unnecessary and unwise.

But I see no harm in putting the uptick rule back in place.  The market operated just fine with that limited prohibition on shorting for decades until it was repealed by the SEC in 2007.

And while there’s ample evidence that the uptick rule had little actual impact on stock prices. It probably couldn’t hurt to go back to the way business used to operate on Wall Street.


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I agree,

I don’t think we need anything other than what we had. I do believe the UPTICK should apply to all players and stocks. The old rule did not apply to OTC stocks or market makers.

Goldman has it’s own interest in mine to cause them noto want an uptick rule. They are cleaning up with algo strategies that would be hindered with an uptick rule.
There comments are suspect.

Posted by Uptick Now | Report as abusive

short selling and naked short selling is tools for institutions to steal individuals’ assets.
Looking at comments you will find, most brokers and institutions are against reinstate rules restrict short selling, and individual and small investor are supportive to rules limit shorts.
Of course, in the financial ocean, sharks also wants to eat fish…

Posted by GSman | Report as abusive

Why would the industry want the Uptick rule and enforcement of naked short selling back in place. Not obvious huh? Well DUH, the short sellers and hedge funds have stolen billions and they are not satisfied yet. What does it take for these theives to be happy and better yet for our worthless SEC to enforce the rules.

Posted by RHURLEY49 | Report as abusive

I forgot to add if the theives say the Uptick rule has no value, then what are they afraid of?

Posted by rhurley49 | Report as abusive

You can see what the lack of an uptick rule does on small caps everyday!

Small caps are literally being priced at the will of the big player who is controlling it. If you buy, they will push it lower, if you short they will push it higher. All fundamentals are gone.

Posted by Irony | Report as abusive

There is a very good movie about this–available only on DVD, of course. Stock Shock is really well done. got it on

We now know the last SEC was corrupt. If the current SEC does not put the UPTICK rule back in, then they are also corrupt.

The SEC does not care about the little guy, they are in bed with the big boys. Every year the playing field become less and less level. At this point, the little guy should just write out a check to Goldman Sachs rather than investing it in the market, Goldman is going to get it anyway.

Posted by Densofthem | Report as abusive

The SEC just requested a copy of the new movie about this: Stock Shock. Finally doing something pro-active!!!! Article here: investigating-illegal-naked-short-sellin g/

Posted by Denise Hubbard | Report as abusive