Short-selling limitations to exclude "market makers"

[LargoWinch]

Am I sure this "regulation" does not apply to Gold, Silver or Crude Oil right? No? Thank god!


BTW, it is my understanding that dictatorships usually also prohibit short-selling. Lets just say that the results are far from satisfactory...


Short-selling rule to exclude market makers

By Joanna Chung in Washington
Published: July 19 2008 03:00 | Last updated: July 19 2008 03:00


Market makers, special traders that match buyers and sellers in the stock market, will be partly excluded from the emergency rule aimed at stopping abusive short-selling, the US Securities and Exchange Commission said yesterday.

The amendment comes three days after the issue of an emergency rule barring so-called "naked" short-selling of shares in significant financial entities, including mortgage financiers Fannie Mae and Freddie Mac and 17 banks, including big Wall Street firms.

Short-sellers aim to profit from share declines, usually by borrowing a stock, selling it and buying it back in the market.

But in a "naked" short the shares are sold without being borrowed first. That allows short-sellers to escape paying interest on the borrowed shares and lowers their trading costs.

The original emergency rule, which could last for up to 30 days starting on Monday, would require anyone making a short sale to borrow the security first and deliver them at settlement, thus preventing short-sellers from using the same parcel of borrowed stock to execute shorts.

But the SEC yesterday said that it had amended the rule so that market makers would be exempt from having to borrow or make an arrangement to borrow before making a trade.

"The purpose of this accommodation is to permit market makers to facilitate customer orders in a -fast-moving market without possible delays associated with complying with the borrow and arrangement-to-borrow requirement of the order," the rule amendment said.

A market maker is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. They include big Wall Street firms such as Goldman Sachs, Lehman Brothers and Morgan Stanley, as well as lesser known names.

An SEC spokesman yesterday said the amendment would "provide all of the new investor protections against naked short sales while assuring continuing liquidity and best execution in our markets".

The emergency rule would apply to trading in shares of Fannie Mae and Freddie Mac - the government-sponsored entities that own or guarantee almost half of US mortgages - and all primary securities dealers including Lehman, whose shares have been battered by rumours the bank says are false.

The action comes amid intensifying efforts by authorities to crack down on rumour-mongering intended to manipulate securities prices.
The SEC has been investigating whether false rumours and abusive short selling contributed to the collapse of Bear Stearns in March and the declines in Lehman's shares.

[nitroglycol]

Re: Short-selling limitations to exclude "market makers"

BTW, it is my understanding that dictatorships usually also prohibit short-selling. Lets just say that the results are far from satisfactory...

Well, this rule doesn't prohibit short selling, just naked short selling. Big difference, in my mind.

My issue with this is more the double standard (why does it only apply to certain specified securities?)

[LargoWinch]

Re: Short-selling limitations to exclude "market makers"

Absolutely right...but still. If someone understands the risks why not? Is it not a similar concept to leverage?

[skidder]

Re: Short-selling limitations to exclude "market makers"

If one is interested in learning more about naked short selling and why some believe it to be extremely damaging to the markets, here is a link that contains a lot of decent reference material.

http://www.financialsense.com/metals/crime/main.html

[Jim Nickerson]

Re: Short-selling limitations to exclude "market makers"

http://www.bloomberg.com/apps/news?p...d=akdA9I.VzTFg

SEC Extends Naked Short-Sale Order on Fannie, Freddie (Update1)

By David Scheer and Edgar Ortega

July 29 (Bloomberg) -- The U.S. Securities and Exchange Commission extended an emergency limit on short sales in shares of Freddie Mac, Fannie Mae and 17 brokerages as it prepares broader rules to thwart stock manipulation.

The SEC pushed back expiration of its ban on so-called naked short sales of the firms' stocks from today through Aug. 12, the Washington-based agency said in a statement. The order aims to keep traders from driving down financial stocks to boost profits after Bear Stearns Cos. and IndyMac Bancorp Inc. collapsed amid rumors they were faltering.

The emergency order, focused on companies whose collapse might expose the U.S. government to losses, gives regulators time to weigh wider restrictions. SEC Chairman Christopher Cox last week told lawmakers the agency is examining other proposals, such applying the ban on naked short sales to the broader market.

``It definitely appears that the SEC is interested in making adjustments to short-sale regulations,'' said John Standerfer, vice president for financial services at S3 Matching Technologies, the Austin, Texas-based trade processor.

In traditional short selling, traders borrow shares and sell them. If the price drops, they profit by re-buying the stock, repaying the loan and pocketing the difference.

Naked short sellers don't borrow shares before settling sales. The SEC is concerned manipulative investors may use the sales, legal under some conditions, to drive down prices by flooding the market with orders to sell shares they don't have.

Arrange to Borrow

The temporary order, which took effect July 21, requires traders to at least arrange to borrow shares before selling short Freddie Mac and Fannie Mae, the government-sponsored mortgage buyers. The order covers brokerages with access to the Federal Reserve's discount window, which was opened to investment banks after the March collapse of Bear Stearns.

Market makers have an exception under the SEC order that permits them to sell short to maintain liquidity. Investors, such as hedge funds, previously could start trades without an agreement to acquire shares.

Short sales, particularly among retail investors, plummeted after the SEC announced the ban, according to data from S3 Matching Technologies, which processes trades for three of the top five retail brokerages. The sales fell 78 percent on average among the companies named in the order, compared with trades on July 14, the day before the SEC announced the measure, S3 data shows. The company handles about 15 billion transactions daily.

`Pretty Restrictive'

``I see no reason that will turn around,'' said Standerfer in an interview yesterday. ``It seems like a pretty restrictive rule to put in place for the entire market.''

Cox last week told Congress the agency may also force investors to disclose ``substantial'' bets on falling stocks and or reinstate a version of the so-called uptick rule, which barred short sales of stocks when prices are falling.

The uptick rule, implemented after the Great Depression and scrapped last year, allowed short sales only if a preceding trade boosted the stock price. The SEC is studying whether increasing the uptick increment, such as to a nickel or dime, might be more effective, he said.

To contact the reporters on this story: David Scheer in New York at dscheer@bloomberg.net; Edgar Ortega in New York at ebarrales@bloomberg.net.

This is pure ignorant speculation on my part, which perhaps someone can elucidate a truer picture.

Is it possible that among some other factors, yesterday's plunge in the equity markets had something to do with the expiration of the earlier ban on naked short-selling? I don't know the time-line on when the extension through August 12 was announced, but if the market (as a being with cognition) was aware there would be an extension, it may have delayed the continuation of yesterday's down trend. The equity indices were up from the opening today.

If the extension of the naked short-selling ban allows for a rally to continue in here, might the rally end when the ban ends at the close of the market on 8/12/08? Unless they extend it again.

[metalman]

Re: Short-selling limitations to exclude "market makers"

http://www.bloomberg.com/apps/news?p...d=akdA9I.VzTFg


This is pure ignorant speculation on my part, which perhaps someone can elucidate a truer picture.

Is it possible that among some other factors, yesterday's plunge in the equity markets had something to do with the expiration of the earlier ban on naked short-selling? I don't know the time-line on when the extension through August 12 was announced, but if the market (as a being with cognition) was aware there would be an extension, it may have delayed the continuation of yesterday's down trend. The equity indices were up from the opening today.

If the extension of the naked short-selling ban allows for a rally to continue in here, might the rally end when the ban ends at the close of the market on 8/12/08? Unless they extend it again.

remember when we used to argue about housing and financials the economy and where they were going? instead of what the gov't might do next to 'save us' from the collapse of housing and financials and the economy, a fact that no one disagrees with anymore but msm assholes?

ah, those were the days.

so we row into the whirlpool together.

[Jim Nickerson]

Re: Short-selling limitations to exclude "market makers"

http://news.yahoo.com/s/nm/20080730/...rtselling_dc_3

SEC extends short selling curb through August 12

WASHINGTON (Reuters) - U.S. securities regulators have extended through August 12 an emergency rule aimed at curbing abusive short selling in the stocks of 19 major financial firms, including mortgage giants Freddie Mac (FRE.N) and Fannie Mae (FNM.N).

The Securities and Exchange Commission rule is part of an agency crackdown on possible market manipulation that some blame for steep declines in the shares of financial companies.

The emergency measure, that first took effect July 21 and will not be further extended, requires investors to borrow a stock before selling it short and to deliver the stock on the settlement date.

The SEC said it would use the additional time to collect more data on the rule's impact and then start a rule-making aimed at providing additional protections against abusive naked short selling in the broader market.

"The order is designed to protect legitimate short selling in these securities, but helps prevent illegitimate naked short selling and potential 'distort and short' manipulation," SEC Chairman Christopher Cox said in a statement.

Cox told a congressional hearing last week that the agency would soon propose a rule extending the emergency short sale requirements to the entire market.

Short sellers arrange to borrow shares they consider overvalued and sell them in hopes of making profit when the price drops.

When an investor does not pre-borrow the shares before shorting the stock, it's called naked short selling, which is illegal if done intentionally.
The temporary rule applies to Lehman Brothers (LEH.N), Goldman Sachs (GS.N), Merrill Lynch (MER.N), Morgan Stanley (MS.N), JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N), among others.

Henry Klehm, a securities lawyer at Jones Day representing financial companies, said it he believed it was important the SEC continue to enforce the rules against naked short selling.

"This orders seems to have dampened the volatility in many of the financial stocks," said Klehm.

The American Bankers Association has been lobbying the SEC to include all publicly traded banks and bank holding companies, such as Washington Mutual Inc (WM.N) and Wachovia Corp (WB.N), whose stocks have been under selling pressure.

Short sellers, meanwhile, have protested that they are being unfairly scapegoated, although the SEC has said it is not looking to outlaw short selling, a type of investing that can keep stocks from becoming overvalued.

The Securities Industry and Financial Markets Association says a broad expansion of the rule would be burdensome.

"Expanding the requirement to pre-borrow for every one of the thousands and thousands of publicly traded companies would involve serious operational challenges, not to mention a likely impact on liquidity and market performance, all of which we are still quantifying," said Ira Hammerman, SIFMA's general counsel, in an e-mailed statement.

The SEC's emergency rule has exempted market makers from the pre-borrow requirement so they can continue to facilitate trading in certain stocks. But market makers are still required to deliver securities by the settlement date.

(Reporting by Kim Dixon; Editing by Tim Dobbyn)

I don't think the SEC has the fortitude to make the rule, or enforce the rule, or overcome what surely will be lobbying on the part of some who may well make their estate payments based on the proceeds of naked short-selling. In other words, I don't think the powers that should will suddenly start controlling naked short-selling.

[touchring]

Re: Short-selling limitations to exclude "market makers"

Now that they can't short, the speculators are going to lose more money if prices drop later - they can't hedge by shorting. The market risk has increased tremendously.

[FRED]

Re: Short-selling limitations to exclude "market makers"

the SEC has said it is not looking to outlaw short selling, a type of investing that can keep stocks from becoming overvalued.

A short seller is a buyer who is committed to purchase at a lower price. Remove them from the market and in a panic a market can fall virtually to nothing. It has happened before. Hope the SEC understands this and does not get carried away with these rules.

[Rajiv]

Re: Short-selling limitations to exclude "market makers"

There is a difference between naked short selling and short selling -- if you have no rules on delivering the stock certificates -- you have essentially counterfeited the stock -- You have to look at the "Failure To Deliver" statistics and also the number of proxies that end up voting at shareholder meetings -- sometimes far in excess of the number of shares outstanding.

The penalties on failure to deliver have to be extremely severe -- and these penalties also have to apply to market makers -- without these, the ability to manipulate stock prices and hence the stock market is very high.