SEC adopts short selling restrictions

Date: Friday, February 26, 2010
Author: Kris Devasabai, HedgeFunds Review

The Securities and Exchange Commission (SEC) has voted to adopt a rule that will restrict the short sale of stocks that are rapidly declining in price.

Under the rule, a circuit breaker would be triggered if a stock declines in price by 10% in a single day. At that point, short selling would only be permitted in a security if the price is above the current national best bid.

Once it is triggered, the rule will apply to short sale orders in that stock for the remainder of the day as well as the following day.

The SEC said the rule, which it described as the "alternative uptick rule", would "enable long sellers to stand in the front of the line and sell their shares before any short sellers".

SEC chairman Mary Schapiro said: "The reason this rule makes sense is because it recognises that short selling can potentially have both a beneficial and a harmful impact on the market depending on the circumstances."

The SEC has been considering imposing restrictions on short selling for almost a year. In April 2009, the regulator proposed two possible approaches to dealing with short selling.

The first proposal would have effectively reinstated the ‘uptick' rule, under which investors can only short a stock after its price rises, or ticks, higher. The other proposal was to impose restrictions only if a stock declined sharply in value. The SEC invited comment on the proposals in August 2009.

"We want to ensure that everyone has a full opportunity to provide their comments on this alternative uptick rule before the Commission reaches any conclusions," Schapiro said at the time.

However, options traders and market makers have raised concerns that the rule would restrict their ability to effectively hedge their positions.