Thursday, February 25, 2010

Lawmakers Find S.E.C.’s Short-Sale Rule Lacking - DealBook Blog -

Lawmakers Find S.E.C.’s Short-Sale Rule Lacking - DealBook Blog -
"The original “uptick rule” was put in place during the Depression in the 1930s to prevent stocks on a downswing from being hammered into the ground by short-sellers. It barred traders from selling short, or betting that a stock would fall, unless there was an uptick in the price. The rule was abolished in 2007 by the S.E.C. after it concluded that advances in trading strategies rendered the old uptick rule ineffective."

The article goes on to remind us that the SEC banned short selling on many stocks during the 2008 bear market, but forgot to mention that majority of studies showed that the ban was unsuccesful.

It goes on:

"The S.E.C. ruled Wednesday to reinstate the uptick rule, but only on individual stocks that experience a one-day 10 percent decline in value. It would stay in effect for the following day, but will be lifted the day after"
One interesting point (worthy of class discussion) dealt with the rule's failure to strengthen Naked short selling regulations:
"...has some support is on beefing up the rules to prevent so-called naked shorting. That is when a trader shorts a stock without actually borrowing the shares. While the practice was banned for the most part by the S.E.C. last year, enforcement of the ban remains subject to arbitrary “reasonable belief standards,” which critics say are difficult to prove."

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