SEC extends curbs on ‘naked shorting’ of big financial stocks
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No reason to mess with success: The Securities and Exchange Commission voted late Tuesday to extend through Aug. 12 its curbs on potentially abusive short selling of major financial stocks.
After six weeks of plummeting bank and brokerage share prices, the SEC on July 15 announced an unprecedented plan aimed at preventing ‘naked’ shorting of 19 of the biggest stocks in the financial sector, including Bank of America Corp., Citigroup Inc., Merrill Lynch & Co. and Fannie Mae.
Maybe it was just a coincidence, but the stock market overall bottomed on July 15. And since then many financial issues have rebounded sharply.
SEC Chairman Christopher Cox has said the agency has no problem with legitimate short sellers -- bearish traders who borrow stock and sell it, betting the price will drop.
But the SEC, Cox said, wanted to prevent so-called naked shorting, which is selling stock without having the borrowed shares lined up. Naked shorting can lead to a ‘bear raid’ on a stock, pummeling it mercilessly.
The temporary rule that took effect on July 21, and would have expired Tuesday if it wasn’t extended, requires that ‘anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.’
That shouldn’t have been a big deal for legitimate short sellers. But it’s entirely possible the SEC’s targeting of the 19 financial issues has had a muffling effect even on the shorts who follow the rules. Why give the securities cops a reason to put you under the magnifying glass?
Or maybe the SEC was just very lucky with its timing -- assuming one of its unstated goals was to halt the market meltdown.
The agency said Tuesday that it won’t extend the rule for the 19 stocks beyond Aug. 12, but expects immediately thereafter to propose ‘additional protections against abusive naked short selling’ for the entire market.