“Federal regulators are floating several options for reining in the practice of short-selling stocks, as investors, corporations and lawmakers clamor for restrictions on moves they say gutted vulnerable companies and worsened the market’s downward spiral,” Marcy Gordon reports for The Associated Press.
“Members of the Securities and Exchange Commission are meeting Wednesday to vote on new rules restricting short-selling, in which traders try to profit from a stock’s decline by selling borrowed shares. Several proposals are expected to be put forward for public comment,” Gordon reports. “The agency could settle on one plan and formally approve it sometime after the comment period.”
“Short-selling is legal and widely in use on Wall Street. The practice 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,” Gordon reports. “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. 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 a number of bank stocks — as well as the demise of investment bank Lehman Brothers.”
MacDailyNews Take: The current situation also allows for short sellers to use rumors, hoaxes, and other methods in order to manipulate share prices. Short selling Apple? Just say “Steve Jobs is dying or just had a heart attack or, whoops, he’s dead, here’s his obituary.’ Instant win. The absence of the Uptick Rule is one of the main reasons why Steve Jobs is currently on a medical leave of absence. Bring back the Uptick Rule. Please see: Has Steve Jobs become too much of a liability for Apple shareholders? – December 17, 2008
Gordon continues, “As the market has plunged, pressure has been building from investors and Congress for the SEC to reinstate the so-called uptick rule, which it abolished in 2007. The rule was established in 1938 during the Depression that followed the 1929 market crash. Those pushing for its restoration say the absence of the rule has fanned volatility in the market, prompting bands of hedge funds and other investors to target weak companies with an avalanche of short-selling.”
MacDailyNews Take: Or target strong companies like Apple with lies and rumors. In fact, it works better with a strong company like Apple, because after being artificially sunk, it then bobs right back up and the shorts can have their way with it all over again. Bring back the Uptick Rule.
Gordon continues, “The uptick rule requires short sellers to wait to sell shares until a stock trades at a price at least slightly above its previous trading price. The idea is to install ‘a bit of a speed bump in a declining market,’ Schapiro told reporters on Monday.”
“Schapiro confirmed that another option being considered, in addition to reinstating the uptick rule, is a sort of ‘circuit breaker’ for stock prices. That approach would force short sellers to sell shares above the going market rate when they execute a short trade — it would only go into effect after a stock price has had a sharp decline by a certain amount.
Another option, known as an upbid rule, would allow short sellers to come in only at a price above the highest current bid for the stock,” Gordon reports.
“The SEC repealed the uptick rule in July 2007, when the stock market was near its peak. A test by the SEC earlier that year, removing the uptick rule for one-third of the stocks in the Russell 3000 index, found it could be eliminated without causing significant harm,” Gordon reports. “‘Those studies were done in quite a different time,’ Schapiro said Monday.
Full article here.
MacDailyNews Take: Those studies were also done by an incompetent SEC and before the shorts really figured out how to screw with the system and take unfair advantage of “free speech” to basically yell “Fire!” in a crowded stock market whenever it suited their needs.
Bring back the Uptick Rule.
And, while the SEC’s at it, how about requiring some sort of licensing for “analysts” that holds them accountable to at least a minimum standard of accuracy and ethics? You can disbar a bad lawyer, wouldn’t it increase trust in the system if bad “analysts” could be expelled from the “profession?” Right now, from what we can tell, there seems to be no qualification process whatsoever for “analysts” and no way to really hold them accountable beyond exposing their inaccuracies in the press. Hair stylists have more oversight. They have schools and licenses and everything.
“Analysts” are able go for years with wildly inaccurate estimates, price targets, and predictions. They seem to be allowed to twist statistics to fit whatever outcome they desire, to invent unachievable goals that companies then “miss,” which, of course, causes them great “concern,” to trumpet rumored products as if they are real and then express “disappointment” when they fail to materialize, and basically do pretty much whatever they want with impunity. Just what are the qualifications required to become a financial “analyst” and what standards exist, if any, to reign in the unscrupulous?
The chairman of the SEC [Christopher Cox] serves at the appointment of the president and has betrayed the public’s trust. If I were President today, I would fire him… Mismanagement and greed became the operating standard while regulators were asleep at the switch. The regulators were asleep, my friends, they were not working for you. [The SEC has allowed abusive short-selling, to turn] our markets into a casino. – Senator John McCain, September 18, 2008