SEC Removes Restriction On Short Selling

by Philip Morton, Investors Offshore.com

18 June 2007

The US Securities and Exchange Commission (SEC) last week voted to remove a rule on short selling put in place in the late 1930s.

By an unanimous vote, the SEC Commissioners removed the so-called 'uptick' rule which barred short selling of a falling stock, and additionally strengthened protections against abusive 'naked' short selling (short selling shares without owning or borrowing them), in order to reduce the number of "persistent failures to deliver stock by the end of the standard three-day settlement period for trades".

The Commission explained that:

"On July 28, 2004, the Commission issued an order creating a one-year pilot temporarily suspending the tick test and any short sale price test of any exchange or national securities association for certain securities. The pilot was created so that the Commission could study the effectiveness of short sale price tests."

"The Commission's Office of Economic Analysis and academic researchers provided the Commission with analyses of the empirical data obtained from the pilot. In addition, the Commission held a roundtable to discuss the results of the pilot. The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation."

"In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test."

The comment period for the proposals will end 30 days from the date of publication of the proposed rules in the Federal Register.

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