Finally, the SEC does something on which I think both A-Train and I will agree. By placing tighter restrictions on failures-to-deliver and by considering reintroducing the uptick rule, the SEC is taking away the ability for short-sellers to manipulate the markets, but legitimate short-selling should not be significantly hampered.
Securities regulators and some financial firms are making it more difficult for investors to pile on when stocks are falling and further drive down prices.
The Securities and Exchange Commission, facing years of criticism, has begun to crimp the ability of traders who bet against stocks to depress prices by selling millions of shares they don’t possess, known as naked short selling. And some financial firms have cut back on lending to traders who want to bet against stocks.
The result: The number of stocks in which big chunks of shares haven’t properly been delivered to investors has plummeted, to a daily average of 79 in the three months ending in March from 529 in the first nine months of 2008, according to an analysis of trading data from major stock exchanges.
At issue are short sellers, traders who sell borrowed shares, betting they can replace them later with shares bought at a lower price.
Critics say short sellers, with the aid of brokerage firms, cause these delivery failures by shorting stocks without first borrowing shares, as required by securities law. Such activity drives down stocks by adding to the selling pressure.
The moves come as the SEC meets Wednesday to discuss further potential restrictions on short sellers. These include reinstating the “uptick rule,” which until 2007 had required short sellers to wait for a rise, or uptick, in a stock’s price before placing their bet that it would go down.
Critics say such trading by short sellers roiled stocks last year by swamping the market with sales that characterized the 2008 market volatility. Amid that turmoil, the SEC closed loopholes that had allowed sold shares to go undelivered.
Art and I got into it a couple of times last fall when the SEC placed restrictions on the short-selling of financial institutions like Citigroup, Bank of America, Goldman Sachs, and of course my own beloved Morgan Stanley. I felt that there was too much panic going on, and the short-sellers were taking advantage of that by continuing to short further driving prices down and placing more stress on these companies’ capital positions.
Art felt like he shouldn’t be restricted from making money capturing price movements in both directions … but as I recall the conversations, he agreed that the uptick rule should be reinstated, and that there should be restrictions on naked shorts. Looks like it’s going to happen.