SEC calls global securities confab to discuss short selling

Short sellers, beware: It looks like the regulatory posse is gunning for you, again.

From the Associated Press:

Securities and Exchange Commission Chairman Christopher Cox has convened a meeting of international regulators for next week to deal with "urgent regulatory issues" stemming from the global financial crisis.

Cox called for a committee of the International Organization of Securities Commissions to discuss topics including regulations on short selling and derivatives, which have come under fire as world markets buckle under the ongoing credit crunch.

The Madrid, Spain-based organization describes itself as the international standard-setter for securities markets. The meeting will be held via teleconference on Monday, the SEC said.

"In addressing turbulent market conditions, it is essential not only that regulators act against securities law violations, including abusive short selling, but also that there be close coordination among international markets to avoid regulatory gaps and unintended consequences," Cox said in a statement.

Cox said the meeting will allow regulators to review recent international steps including those taken to curtail abuses by short sellers, and coordinate future policies so that they are "effective and mutually reinforcing."

With financial stocks in another meltdown this week, Citigroup Inc. reportedly has been pressing the SEC to reinstate a ban on shorting its stock and others in the sector.

Short sellers borrow stock and sell it, betting the price will plunge. If the bet is correct, they can buy new shares later at a lower price to repay the loaned shares, and pocket the difference between the sale price and the repurchase price.

The shorts are routinely accused of spreading dire rumors about companies to help drive shares lower.

The SEC outlawed shorting of more than 800 financial stocks from Sept. 19 to Oct. 8, in a bid to stop "sudden and excessive fluctuations" in the shares.

Many of the stocks fell anyway in that period, and the SEC’s move was roundly criticized as boneheaded and just another form of market manipulation.

Photo: SEC Chairman Christopher Cox. Credit: Brendan Smialowski / Bloomberg News

Comments

[Don Coyne]

There was nothing wrong with short selling that needed to be fixed until the SEC decided to eliminate the shorting uptick rule for individual securities in July, 2007.

This rule, requiring an uptick in price before shorting, was put in place after the 1929 crash and subsequent bear market to prevent the kind of short selling raids that Christopher Cox now wants to have investigated.

High volatility in the market is not conducive to good investor psychology. Is it at all surprising that the market now shows the most volatility since the 1930s before the uptick rule was put in place?

According to my analysis of the daily trading range of the S&P500 index, it doubled shortly after the SEC took away the uptick rule, and with greater fear pervading the market currently, it is now well beyond that.

It is time for the SEC to stop trying to find all other ways to control short selling and just reinstate the uptick rule.

The likely effect of eliminating the uptick rule was not that difficult to predict at the time it occurred. Here is a short poem I sent to friends and clients on July 27, 2007:

NO TICKIE, MUCH SICKIE by Don Coyne

The powers that be seem excessively cruel;
They've abolished the required uptick rule.
And so the market seems more of a beast
Since daily ranges have now increased.
As shorting traders go to town
And push the market further down,
They'll also help each rally extend
As covering comes in to help the trend.
It now will test most traders' ability
To cope with the increased volatility.

Don Coyne
Coyne Capital Management
dscoyne@hotmail.com

[martscan]

Without going into a treatse on the pros and cons of short sales, suffice to say, IMO, shorting is no more an instrument of vice than methods used in 'pumping' stocks. In any event, most nefarious operators utilize options, rather than actual stock trades, on both sides of the mkt. It seems to me that Cox is engaging in nothing but PR to get the monkey off his back for his agency's regulatory incompetency. Why is it that so-called 'free marketers' really only want markets, protected by govt regulations, that favor their positions? Shorting is basically free market arbitrage...and neither an uptick rule or any other modification should hamper free markets...right?

[martscan]

Does anyone in their right mind, besides Vikram Pandit, believe short selling and 'rumors' are the cause of Citi's downfall? That is a joke of the first rank. Even funnier is the thought that the uptick rule, even if never done away with, would have mitigated Citi's deserved stock collapse. A financial services behemoth that would be impossible to manage, let alone monitor risk properly, by geniuses, was a time bomb waiting to go off. The fact that present management are no geniuses only hastens Citi's demise. Sandy Weil could put things together and create a gargantuan entity...but even the great one couldn't manage this monstrosity. Weil's model was inherently flawed from day one. Citi is history, and Pandit's protestations, the uptick rule and shorting had absolutely nothing to do with it.

[kitty]

Forget Citi, there have been plenty of cases throughout this year in which good solid companies - companies that are yet to have a single bad quarter - were driven down by naked shorting. In many cases we had preceding rumors. Like with one large company, there was an e-mail circulating it would warn. As a result, the stock dropped from 100-something to 90 within days. A few days later the company pre-announced stellar earnings, but by then the damage was done and the price never recovered. Smaller companies were driven out of business.

This has never happened before the uptick rule was in place. We haven't seen this in 2003, for example. Since last November and especially this year the whole market has the feel of a casino with good earnings not meaning a thing.

[martscan]

Why don't people that beef about shorting healthy, profitable stocks identify them with the stats of the short interest? It wouldn't be difficult to determine the effect of inordinate short interest on these specific, otherwise 'stellar' companies' stock prices, vis-a-vis similar stocks of the same sector. Let's see the evidence of good, solid companies being ruined by 'naked' shorting...and the preceding rumors that precipitated the shorting. The fact of the matter is no such evidence exists.