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Federal regulators today made a rule permanent that was originally just an emergency rule that was meant to reduce abusive short selling during the stock market’s largest drops. The SEC announced that the action was targeting those who do “naked” short selling, which was expected to expire on Friday.

Regular short selling is basically when investors bet against a stock. They borrow a company’s shares, sell them, and buy them back when the stock falls and returns the stocks to the lender (and keep the difference in price). Naked short selling occurs when those sellers don’t borrow the shares before selling them and just look into covering their positions after the sale has occurred.

The SEC emergency rule includes a requirement that the brokers have to buy or borrow securities to actually deliver during a short sale. They have also been considering several new ways to rein in the rush of regular short sellers that have been trying to cash in on the fall in stock prices.

The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans. One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves — actions that battered the stocks of banks and other companies over the last year.

Another way to stop the increase in short sellers would be to ban short selling for the remainder of the trading session when a stock declines 10% or more.

The SEC and their staff are working with stock exchanges to make short sale data and volume publicaly available through the websites of the exchanges. This should result in an increase of the amount of information currently required according to the SEC.

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Jeremy

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