Short selling revisions

In a decision that ought to make the A-train happy … or at least happier:

SEC Quickly Revises Short-Selling Rules –

Shift on Financials, Hedge Funds Sends Traders Scrambling

WASHINGTON — The Securities and Exchange Commission said shortly after midnight Monday that it would revise rules to curb short selling that it had issued just three days before.

The SEC’s latest change of direction on short selling caught some market participants off guard and prompted criticism that the agency has miscalculated the impact of its rulemaking.

The SEC, in a release issued at 12:26 a.m. EST Monday, reversed a position it had taken Friday when it said that market makers couldn’t short financial stocks after Friday. The new rules as of Monday: Those engaged in bona fide market making and hedging activity, including in derivative contracts, could continue to short.

“The purpose of this accommodation is to permit market makers to continue to provide liquidity to the markets,” the SEC explained in the revised order. To try to prevent short sellers from using market makers to take big positions, the SEC said market makers couldn’t short for a customer if it would give them a net short position in the security.

Also Friday, the SEC issued a temporary ban on short sales in nearly 800 financial stocks, including those who make markets in the securities. In a short sale, investors borrow shares and sell them, hoping the stock will fall and they can buy it back at a lower price.

The agency said Friday that hedge-fund and money mangers needed to disclose short positions the first Monday following the trade.

Monday’s rules: Hedge funds still must disclose their positions to the SEC, but the SEC won’t make the trades public until two weeks later. The SEC also announced Monday that it had delegated to the stock exchanges the decision about which company makes the no-shorting list.

So no longer an outright ban on shorting financials; legitimate hedging and liquidity shorting is still allowed, as long as the market maker ends net-long or flat.