Would New Rule Ease Stock Drops?
SEC proposes reinstating uptick rule to rein in short selling.
WASHINGTON, April 8, 2009— -- The Securities and Exchange Commission today unanimously proposed new measures to make it tougher to profit by short selling stocks, including reinstating the uptick rule, although it will be months before any changes take effect.
Short selling is commonly defined as the practice of selling borrowed stocks, and then attempting to purchase them later at a lower price, thereby profiting from the drop in price.
SEC chief Mary Schapiro warned at this morning's open meeting in Washington that "Short selling may also be used to illegally manipulate stock prices. ... In addition, unrestricted short selling can exacerbate a declining market in a security.
"In the past 18 months, we have seen every major stock market around the world experience steep declines and extreme volatility in securities prices," she said. "Although we are not aware of specific empirical evidence that the 2007 elimination of short sale price tests contributed to this volatility in the U.S. markets, many members of the public have come to associate short selling with that volatility, and with a loss of investor confidence."
To address the problem, the SEC today made five proposals, including reinstating the uptick rule, which makes short sellers wait to sell shares until a stock trades at least a penny above its previous trading price.
"This is a very good rule," said Hugh Johnson, chairman of Johnson Illington Advisors in Albany, N.Y. "It's very favorable, it's very positive, but it's long overdue. It prevents aggressive speculators who don't even own the stock from selling the stock or driving it down without any constraints or limitations or rules."
The uptick rule was originally established in 1938 during the Great Depression as a reaction to the stock market crash of 1929, but the SEC repealed it about two years ago.
"It caused a lot of problems," Johnson said of the rule's absence. "If you continue to drive the price of, say, Citigroup, down, that's got to scare the depositors and short-term lenders. They start to ask the question 'Will this company stay in business?' And if their answer is, 'Well, I'm not sure,' then as a depositor you may pull your money and as an investor or short-term lender you may refuse to roll over your loans to Citigroup, which puts Citigroup in a very tough spot."
