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November 11, 2008

New Short-Sale Rules A'Comin'?

By Peter Chapman

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  • New Short-Sale Rules A'Comin'?

The Securities and Exchange Commission's ban on short sales may be a distant memory at this point, but that doesn't mean new short-sale rules aren't in the offing.

The regulator's emergency ban on the shorting of nearly 1,000 securities lasted for a few weeks, between Sept. 19 and Oct. 8, and by many accounts wreaked havoc on the market. Liquidity dried up, spreads widened, and volatility surged.

Whether or not the ban "restored equilibrium" in the markets for securities issued by the nation's banks, as the SEC intended, will probably never be known. But it did temporarily silence critics of the SEC who said it was not doing enough during a time of national crisis.

While SEC economists were studying data from the time of the ban to try to determine its impact, the Division of Trading and Markets was considering future rule-making. It turned to a group of industry executives for help, asking them to offer some ideas on future short-sale rules.

As Traders Magazine was going to press, the working group had just presented the regulator with some thoughts as to what type of regulation would work best if the SEC did decide to push for new short-sale rules. The group included executives from NYSE Euronext, Nasdaq OMX Group, BATS Trading, UBS, Goldman Sachs, Morgan Stanley and the Financial Industry Regulatory Authority.

Any new rules apparently boil down to two choices: (a) a price-test rule and/or (b) a circuit-breaker temporary ban. The group unanimously rejected the idea of a price test such as the recently decommissioned uptick rule. Instead, it suggested some kind of circuit breaker would be most effective.

Many issuers, members of Congress and the American public had been calling for a reinstatement of the uptick rule, which banned shorting if the last sale was lower than the previous sale, and which had been mothballed by the SEC in 2007. The SEC had spent four years studying the issue before deciding to kill the uptick rule and is said to be loath to bring it back.

Still, public statements by SEC officials are keeping the dream alive for some fans of the rule. Erik Sirri, director of the Division of Trading and Markets, told conference-goers at an Investment Company Institute forum on Oct. 6 the SEC was considering bringing it back.

The reality is probably different. NYSE Euronext chief executive Duncan Niederauer, in a letter to NYSE issuers, said the idea of an uptick rule was dead. "After a few weeks of trying to build consensus on this issue," Niederauer said, "it is clear to me we are in the minority. We support it and many of our issuers support it. The SEC staff and most of the commissioners do not appear to support a return to an uptick rule, nor do the other U.S. exchanges or a majority of the leading market participants."