SEC roundtable: circuit breakers most favoured short-selling rule

On April 8, the SEC voted to propose several approaches to potential new rules for short-selling restrictions. The regulator is gathering public comment on the proposals, and the roundtable was part of the debate on them.

At the panel discussions, SEC chairman Mary Schapiro said, "I have made it a priority to evaluate the issue of short-selling regulation and ensure that any future policies in this area are the result of a deliberate and thoughtful process."

The proposed approaches to restricting short selling include a reintroduction of a version of the uptick rule, which would mean that a stock could only be sold short if the price of the last trade on the stock was higher than the price on the preceding trade, preventing short sellers from driving down the price of an equity that is already declining in value. It was suggested the uptick rule could either be reinstated as it was before, where a short-sale price test is based on the last sale price or tick, or as a modified uptick rule, where the short-sale price test would be based on the national best bid (the best available bid price quoted across all exchanges and market-makers).

Other propositions include introducing temporary short-selling restrictions upon individual securities during periods of severe declines in their price. This could take the form of circuit breakers to ban short selling for the remainder of the day if there is a severe decline in price of a security. Alternatively, there could be circuit breakers that introduce either the uptick rule or modified uptick rule during times of a large fall in a stock's price.

Participants in the roundtable discussions included banks, asset managers, brokers, academics and a regulator. The idea of new regulation was met with resistance from some debaters. If new regulations were imposed, they would prefer the circuit-breaker option over a reintroduction of the uptick rule.

"Fidelity believes the best way to protect investors and maintain the benefit of an open, liquid and transparent market is to not adopt any of the proposals that are put up for comment," said Brian Conroy, global head of equity trading at Boston-based investment manager Fidelity Investments.

But if the SEC decided to go ahead with some form of regulatory action, Conroy suggested the Commission should implement a short-selling restriction that only acts temporarily when equity markets are in steep decline, rather than permanently, which could increase trading costs for investors. "Fidelity believes the circuit breaker should be the only option considered for this scenario," he added.

Meanwhile, Kevin Cronin, director of global equity trading at Atlanta, Georgia-based asset manager Invesco, also argued against new regulation for the time being.

"We believe that immediate SEC action is not warranted, at the very least, until the impact of the options before us are considered further. If the SEC determines it must mover forward, Invesco believes that a circuit breaker with the proposed modified uptick rule would be the least damaging to the markets," he stated.

The regulator that was part of discussions also preferred circuit breakers with a modified uptick rule, claiming the national best bid price quotes would provide more integrity than the traditional uptick rule.

"If there is going to be regulation, I strongly think that it should be focussed on the circuit-breaker side of the proposals. In addition, price quotes are certainly better than trade prices. Speaking as a regulator, I don't want to be involved in the situations where I have to worry about who is gaining with respect to creating upticks and I don't think that it makes a great deal of sense," said Richard Ketchum, chairman and chief executive of the Washington, DC-based Financial Integrity Regulatory Authority.

See also: Short-selling ban increased volatility more than credit crisis
CBOE chief sees SEC reintroducing short-selling uptick rule

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