SEC Curbs Shorting of GSE Stocks, Considers Limits for Wider Market

Wall Street Journal ^ | 15 Ju.ly 2008 | KARA SCANNELL

[shrinkermd]

WASHINGTON--The Securities and Exchange Commission announced an emergency action aimed at reducing short-selling that targets Wall Street brokerage firms as well as Fannie Mae and Freddie Mac, and will immediately begin considering new rules to extend new requirements to the rest of the market.

SEC Chairman Christopher Cox said the SEC would institute an emergency order requiring any traders to pre-borrow stock before shorting Fannie Mae and Freddie Mac, the embattled government-sponsored entities that own or back more than half the nation's mortgages. It would also apply to the stocks of Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley. The order is a near-term fix and will expire in 30 days.

Mr. Cox said the SEC "will undertake a rulemaking to address the same issues" across the market.

The move will likely limit short-selling for the two mortgage entities, which have seen their stock prices fall sharply in recent weeks. Wall Street has been calling for the SEC to address short-selling, which some believe is contributing to market volatility and could be used to manipulate shares of financial stocks.

It comes as short-interest, or the amount of outstanding short positions, is at an all-time high for NYSE Euronext-listed stocks.

Short-selling, a legitimate trading strategy geared to profit from falling stock prices, has long been a lightning rod issue, so changes that cover the entire market will likely be hotly debated. Companies have complained that short-sellers target their stocks with the purpose of driving them down, while short-sellers have been credited with identifying a company's true market value.

[shrinkermd]

A constant concern has been shorting stocks you have not borrowed. This used to be somewhat attenuated by the downtick rule. This rule said you could not short a stock on the downtick.

Incidentally, this downtick rule was suspended with great hosanas last August. Correlation is not causation but since then the market has been down with a few interveing rallies.

Big players can manipulate prices if they don't have to have the borrowed stock in posession. Requiring the stock to be in posession before shorting should be studied before it is implemented.

All told, I am supportive of this, but, I must say, I am no financial or stock market guru.

[what's up]

Some say the naked short sellers are controlling this market.

This rule may be a good thing.

(Short selling itself is not curtailed, just the "naked" selling.)

[rbmillerjr]

Now the list includes GSE’s Fannie Mae and Freddie Mac, with the potentially expansive clause, “and other major investment bankers”.

In addition to the government buying nonsecured mortgage loans, which have no assessable value, from BSC and other investment bankers...and the Treasurey warning that it will buy the stock of the two poor quality GSE’s above...how long will it take for the government of an Obama WH or Clinton WH to do the same for solar panel companies, wind companies, vegan restaraunts, and other “socially responsible” companies.

We are transitioning from free market to a socialist economy where failure is not permitted.

...unbelievable...

[TimSkalaBim]

What does “pre-borrow” mean? Whatever it means, it sounds like it interferes with the arbitrage function of short-selling; in other words, screwing up a market already in rough shape.

[NVDave]

When you short a stock, your broker should go into their books and find someone (some other client of theirs) who is long the stock. They mark that stock as “borrowed” then mark it into your account as “there” just long enough to allow you to sell the stock.

In “naked” short selling, the broker will allow you to short, assuming that they’ll be able to find sufficient long stock to mark against your short position.