Tucson CitizenTucson Citizen

SEC chief says new short-selling rules a priority

WASHINGTON – The head of the Securities and Exchange Commission said Tuesday she is making the issue of new rules restricting short-selling a priority as the agency heard from an array of interests about ways to limit trades that bet against a stock.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn.

“There are people very concerned about this,” Jeffrey Brown, Charles Schwab Corp.’s chief lobbyist said at a public “round-table” meeting organized by the SEC. The brokerage firm has been barraged with appeals from customers for it to seek a remedy, he said.

SEC Chairman Mary Schapiro said she has made it a priority “to evaluate the issue of short-selling regulation, and ensure that any future policies in this area are the result of a deliberate and thoughtful process.”

Representatives of other companies including General Electric Co., JPMorgan Chase & Co., the New York Stock Exchange, Nasdaq Stock Market and several universities were participating in the forum.

One option the SEC has advanced is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves — actions that battered the stocks of banks and other companies over the last year.

Short-selling involves borrowing a company’s shares, selling them, then buying them back when the stock falls and returning them to the lender. The short seller pockets the difference in price.

Another approach floated by the SEC would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more. Officials of Fidelity Investments, investment bank Credit Suisse and others made the case for that option, called a “circuit breaker” for stock prices.

There isn’t clear evidence that restoration of the uptick rule would have dampened the market tumult of last fall, they said. Dan Mathisson, the head of electronic trading at Credit Suisse, said it would take about six months for brokerage firms to refit their trading systems for an uptick rule.

But John Kozak, chief financial officer of Newark, Ohio-based Park National Bank Corp., urged reinstatement of the uptick rule in some form — the position espoused by the American Bankers Association.

Countering Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority, Kozak said it was “ridiculous” to suggest that the uptick rule wouldn’t have an impact. It “absolutely can influence our price substantially,” Kozak said.

Although many in the public blame short-selling for enflaming market volatility over the past 18 months, Schapiro has noted there is no “specific empirical evidence” that the absence of the uptick rule fueled it.

Schapiro and the other four SEC commissioners voted unanimously last month to put forward five alternative short-selling plans. They could settle on one and formally approve it sometime after the 60-day public comment period that began in early April.

Many financial and some other company stocks were targeted by short sellers in the market turmoil that began in mid-2008. The SEC put the stocks of 870 U.S. companies, mostly financial institutions, under an unprecedented ban against all short-selling for several weeks last fall until Congress enacted the $700 billion financial bailout plan.

Short-selling is legal and widely used on Wall Street. But as the market has plunged, investors and lawmakers have pressed the SEC to reinstate the uptick rule. They say its absence since mid-2007 fanned market volatility, prompting bands of hedge funds and other investors to target weak companies with an avalanche of short-selling.

Proponents of short-selling say it can make markets more efficient, bring in more capital and raise warning signs about weak or badly managed companies. Professional short sellers and some analysts also have warned that restricting short-selling could distort edgy markets.

But companies and regulators maintain that the practice widened the scope of the financial crisis and contributed to the collapse in value last fall of many bank stocks and the demise of Lehman Brothers.

Schapiro has acknowledged the SEC’s difficult task in striking a balance between stemming market abuses to bolster investors’ confidence and stifling the legitimate benefits of short-selling.

The SEC has advanced three possible variations for the circuit breaker proposal: Banning short-selling outright for the rest of the trading session in a stock that declines 10 percent or more, or restricting short-selling of the stock for the rest of the session based on its previous sale price or highest bid.

The fifth alternative, known as an upbid rule, would allow short sellers to come in only at a price above the highest current bid for the stock.

Citizen Online Archive, 2006-2009

This archive contains all the stories that appeared on the Tucson Citizen's website from mid-2006 to June 1, 2009.

In 2010, a power surge fried a server that contained all of videos linked to dozens of stories in this archive. Also, a server that contained all of the databases for dozens of stories was accidentally erased, so all of those links are broken as well. However, all of the text and photos that accompanied some stories have been preserved.

For all of the stories that were archived by the Tucson Citizen newspaper's library in a digital archive between 1993 and 2009, go to Morgue Part 2

Search site | Terms of service