SEC adopts new limits on ‘short sellers’
The Securities and Exchange Commission on Wednesday approved new restrictions on “short sellers” -- traders who bet on falling stock prices.
The SEC, which has been wrestling with the issue for nearly two years, voted 3 to 2 to limit short sales in any stock that falls 10% or more in one session. At that point, and through the following day, a short sale would be permitted only at a price above the highest price any bidder is offering to pay for the stock.
SEC Chairwoman Mary Schapiro said in a statement that the new rule reflected the agency’s concern that “excessive downward price pressure on individual securities, accompanied by the fear of unconstrained short selling, can destabilize our markets and undermine investor confidence in our markets.”
The SEC’s two Republican members, Troy Paredes and Kathleen Casey, voted against the rule, questioning the need for it and expressing concern about the costs that the financial industry will bear in complying with the provision.
The commission has been trying to decide whether -- and how -- to restrict short sales since the credit crisis mushroomed in 2008 and executives of some financial companies complained that their stocks were being targeted for collapse by short sellers.
In a typical short sale, a trader borrows stock (usually from a brokerage) and sells it, expecting the market price to decline. If the price in fact drops, the short seller can buy the stock, return the borrowed shares and pocket the difference between the short-sale price and the repurchase price.
If the stock rises, however, the short seller’s losses can be unlimited until the trade is closed out.
Critics say short sellers can gang up on a stock, driving it lower and making their bet self-fulfilling. Short sellers, however, say they are market truth-seekers, exposing companies whose shares are inflated, in some cases because of management malfeasance.
The SEC sees its new rule as a compromise between doing nothing and restoring the old “uptick” rule, under which short sellers could make a sale only if a stock’s market price had ticked higher from the last transaction price. The uptick rule, aimed at preventing a cascading effect when a stock was falling, was repealed by the SEC in 2007 after 70 years on the books, after an agency study concluded that it no longer was needed.
Sens. Ted Kaufman (D-Del.) and Johnny Isakson (R-Ga.), who have argued for tougher restrictions on short sellers, said in a statement that they were “encouraged” by the SEC’s decision Wednesday but predicted the rule change “will be of limited use, helping only in the worst-case scenarios that could occur during a terrorist attack or financial crisis.
“The uptick rule worked for 70 years as a systemic check on predatory bear raids; this approach will not provide investors with the same protections,” they said.
The Coalition of Private Investment Cos., chaired by legendary short seller Jim Chanos, slammed the SEC’s move, saying it would raise transaction costs, reduce market quality and undermine confidence in the pricing of shares.
“This puts a government thumb on the scale of stock prices,” Chanos said. “Efforts to prop up stock prices where the fundamentals will not sustain them will inevitably fail.”
