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November 1, 2003

New Short-Sale Rule Coming

By Editorial Staff

The Securities and Exchange Commission, possibly in response to complaints about an uneven playing field, is expected to introduce on a trial basis a new short sale rule that will cut across all markets.

The SEC, which recently examined the rule change, is expected to temporarily modify Rule 10a-1 and apply it across all trading venues. As Traders Magazine went to press, the SEC was expected to vote on the measure - a uniform bid test rule - following a public comment period.

Under the current "tick test" system, SEC rules permit the short sales of exchange listed stocks when the stock is rising. Nasdaq operates under a bid test rule, which permits the short selling of a stock when the last bid is higher than the previous bid. The proposed change has been coming for several years, prompted by an array of issues, including most prominently, penny pricing.

This has led to pricing confusion in fast moving markets, say trading pros, making it difficult to discern if the last price was an uptick or a downtick.

The proposal is also fuelled by fears of naked short selling abuses by shady operators, working in a regulatory twilight zone.

An SEC spokesman declined comment. However, William Singer, a New York-based securities attorney, says he would not be surprised if the SEC acted to permanently modify the measure.

"They are starting to clamp down on the short sale rule. The SEC has recently started to impose more fines and sanctions than they ever have," said Singer, a critic of the rule, which traces its origins to the Great Depression era.

Electronic Competition
Nasdaq has complained that, while it imposes a short sale rule on its trading platforms, many of its electronic competitors don't have short sale controls. However, Singer dismisses the controversy.

"Basically, there should be no short sale rule because it has become an anachronism. It is an outdated and ridiculous concept. People need to have the capacity to protect themselves against bear markets and that's why people need to sell short. And why are there no rules against selling long?" Singer asked.