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May 5, 2009

The Long and Short

By Michael Scotti, Editorial Director

Michael Scotti


The debate on short selling will continue for some time, according to one expert quoted in this month's cover story.

As you know, short sellers got new rules two years back. And when the stock market was hammered last fall, many questioned the wisdom of eliminating the uptick rule, which had regulated short selling for 70 years. Responding to public outcry, the Securities and Exchange Commission last month came out with five separate potential new rules that could guide short selling in the future.

Peter Chepucavage, a consultant and former SEC official, told Traders Magazine: "This will get very complicated. It will get delayed. I wouldn't hold your breath for a bid or a tick test in the next year." Indeed, the story--written by Peter Chapman--outlines the complexities of the new rules, as well as the varied opinions of trading professionals on this heated topic.

Chapman has been writing about the rules of short selling for the last few years. He also covered this topic when the current rule--Reg SHO--was a pilot program before becoming law. His analysis and eye for detail should give readers an understanding of the issues and what the trading community is thinking right now.

The current short-selling rules, along with volatility and wider spreads, have also helped to make arbitrage strategies very profitable. That's a separate story in this month's issue.

There's also a short-selling twist to this month's Buyside Snapshot. The backbone of the story is a survey that outlines the buyside's views on short selling and which rules they prefer. As one might have suspected, the long-only crowd was heavily in favor of new short-selling regs, while about half as many in the hedge fund community favored new rules. The survey offers some additional insight into the differences between traditional managers and hedge funds.

We've also got another survey. One that asks: How were traders compensated at the big banks in 2008, anyway? Conducted by the Options Group, this survey reports what you probably expected-comp was down big. But there is some additional color that offers a fuller picture. Compensation is always the biggest issue on Wall Street.

Today, with the rise of the execution-only shops and the increase of independents specializing in research and trading, the next phase of Wall Street's evolution will be an interesting one. More firms are moving to performance-based compensation. And all eyes will be on the big Wall Street firms, looking to see how they compensate employees. And that decision will be based in part on how they are best able to compete with smaller and nimbler competition. Enjoy the issue.

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