SEC tightens rules further on short selling

The US Securities and Exchange Commission (SEC) has released new rules on short selling, aimed at preventing sustained declines in stock prices. Rule 201, published yesterday, includes a 'circuit breaker' that would trip if the price of a security fell more than 10% during a day of trading. After the circuit breaker had been tripped, short selling would be banned unless the price was above the current best bid. The objective of this rule, known as the alternative uptick rule, is to stop short sellers driving the price down further.

The rule represents an amalgamation of two suggestions made by the SEC in August last year – it originally proposed to permit only short sales above the last sale price or national best bid, or to impose a circuit breaker that would stop short selling altogether after a fall below a certain threshold. A previous uptick rule was abolished in 2007 – this permitted short selling only when the last sale was made at a higher price than the sale before.

Bans or restrictions on short selling, especially of financial stocks, were put in place around the world during the financial crisis, but their effect is debatable, with some research suggesting they might have increased volatility. The SEC's ban came into force on September 19, 2008, as markets tumbled after the collapse of Lehman Brothers. The regulator had imposed a ban on naked short selling of financial stock in July the same year.

SEC chairman Mary Schapiro said the rule represented the regulator's concern that  "excessive downward price pressure on individual securities, accompanied by the fear of unconstrained short selling, can destabilise our markets and undermine investor confidence in our markets".

 

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