economics

March 15, 2010

In 3-2 Vote, SEC Limits Short Sales

Filed under: Uncategorized — ktetaichinh @ 9:40 pm
Tags: , ,

WASHINGTON—The Securities and Exchange Commission narrowly approved curbs on short selling, addressing what some consider a cause of the 2008 financial crisis despite criticism that there was no evidence to support the move.

The commission voted 3-2 on party lines to make the curbs final, in another indication Chairman Mary Schapiro is having trouble gaining unanimity for her ambitious agenda to toughen the nation’s securities rules.

In short selling, investors try to profit by borrowing shares and selling them. If the shares fall, the investors can buy them back at a lower price and pocket the difference. When financial stocks were diving during 2008, critics said speculators were abusing the tactic to artificially drive down the price of certain stocks.

Ms. Schapiro said she recognized that short selling can benefit the market, but added: “We also are concerned that excessive downward price pressure on individual securities, accompanied by the fear of unconstrained short selling, can destabilize our markets and undermine investor confidence in our markets.”

Her critics, including the two Republican commissioners, didn’t buy it.

The rule is “rooted in conjecture and too speculative,” said Republican Commissioner Troy Paredes. Fellow Republican Kathleen Casey said the commission found no empirical evidence short selling contributed to the market turmoil.

The rule applies to stocks that decline at least 10% in a single day. For such stocks, the SEC will allow short selling only if the price of the sale is above the highest bid price nationally. In other words, the short seller is blocked from dumping the shares at a cut-rate price.

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