The SEC originally released a discussion paper on April 8, outlining possible methods to prevent abusive short selling. This deadline expired on June 17, but the SEC has elected to seek further market comment over the next 30 days, while narrowing the scope of its original paper to focus on two possible options.
The first option, known as the 'alternative uptick rule', envisages a market-wide approach, where only short sales above the last sale price or national best bid – the best available bid price quoted across all exchanges and market-makers – would be allowed.
This approach differs from the SEC's previously proposed 'modified uptick rule' and the 'proposed uptick rule' in that it would not allow short selling at either the current national best bid or the last sale price.
According to the SEC, this new proposal would be easier to observe as there would be no need to monitor the sequence of bids. It is also thought that this approach will be quicker to adopt and less costly.
The second option is the ‘circuit breaker' approach – generally more favoured at roundtable discussions in May – which would work with certain securities when the price of that security had declined by a fixed amount. The circuit breaker would either lead to a complete halt of short-selling activity on that security, or a short-sale restriction based on either the last sale price or the national best bid.
Amid the financial turmoil, the SEC temporarily banned short selling on September 19, 2008. Since then, the SEC has examined various measures to prevent abusive short selling, without detracting from the potential benefits short selling can provide, such as market liquidity, pricing efficiency and hedging.
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