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Tim Quast
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April 1, 2001

Short Sale Rule Blunted

By Editorial Staff

The SEC has softened a Depression-era anti-fraud rule that prohibited selling a stock short when its share price is dropping.

The agency granted a limited exemption to the "short sale rule" in listed trading, in response to requests from specialists and market makers. These included Bernard L. Madoff Investment Securities. Some of the dealers said that in a decimal environment, with additional price point movements, it became easier to unintentionally violate the rule.

The upshot of the change, which was contained in a letter from the SEC to Madoff, is that dealers will now be allowed to sell short at the best offer to fulfill a customer buy order.

The Securities and Exchange Commission stressed, however, that the change was not intended to allow dealers to unlawfully line their pocketbooks. The SEC doesn't want the change to be used as an excuse by dealers to put downward pressure on the market.

That concern is at the heart of the original short sale rule which prohibits selling a stock short on a downtick. The agency said it wants to amend the rule. In 1999, it published a concept release on the proposal with several options. These included the elimination of the short sale rule.