The Securities and Exchange Commission has announced new measures this morning to curb naked short sales. The rules impose a firm close-out requirement on short sellers and their brokers. Parties must now deliver securities borrowed for short sales on the trade settlement date, which is three days after the transaction date. Supposedly, penalties will be imposed if the parties do not comply. The interim final rule will take effect as of 12:01 a.m. EDT on Thursday.
The SEC has also finalized two other proposed changes. This probably will eliminate an exception from the close-out rules foroptions market makers. Another new rule targets short sales where sellers misrepresenttheir ability to deliver borrowed shares. This second change goes intoeffect immediately.
There is nothing wrong with short selling. It makes for efficient markets. After all, asale does mean that someone else bought the other side of the trade.But this wholesale naked short selling that has occurred has been atrocious.When you gamble in Las Vegas they make you put your bet on the tablerather than yell out numbers to the dealer with no proof youcan cover your wager. There are exceptions, but what has been going onlately has to stop. Traders have been able to sell with no regard ofthe bet.
You have to wonder why the SEC has allowedthis to occur. Markets should not be rigged. Butthey should have safeguards in place that prevent groups of investorsfrom targeting stocks without having to put anything up.
SEC head Christopher Cox is now finally tying to show a zero tolerance policy. All we can say to that is "It’s about time."
Jon C. Ogg
September 17, 2008