A New SEC Induced Rally?

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Includes: DIA, QQQ, SPY
by: David Enke

As somewhat expected, it is being reported at Reuters, the WSJ, and elsewhere that the SEC is planning to extend the temporary curbs on short-selling set to expire Tuesday. Plans are also being made to extend the curbs to cover additional equities, beyond the original 19 financial stocks. New curb limits could now include insurance, housing, and additional financial stocks.

The SEC is also apparently considering making the rules permanent, but that would require later finalization, not to mention changes in the way shares are borrowed in order to speed up and automate the process beyond making phone calls for authorization.

Some on Wall Street, including executives and hedge fund participants, are lobbying the SEC in an attempt to get them to reconsider. I would suspect that if the curbs were extended, increased to cover more stocks, or made permanent (which I would assume would include all stocks), then we may get another SEC induced rally that now obviously includes more than just the financial stocks. Or will we?

Some, even in the hedge fund industry, have mentioned that it is still easy to borrow anything you want. Others say that while borrowing is still possible, the cost of borrowing has increased, and is having an impact. Due to their size or frequency of trading, the real impact may be on smaller firms and those using programmed trading.

Markets certainly get nervous when regulators start getting more involved, but on the surface this seems more like a way to enforce what should have been done in the first place. Of course, that does not mean it will not impact a market that is used to borrowing now and worrying about that messy back office stuff later, or that it will not negatively affect those that need to provide liquidity to the market (the SEC is already considering market maker exemptions).

A more automated system for borrowing will also need to be implement if the rules are extended and expanded. The worst thing would be for the SEC to continue to micro-manage the current sectors in trouble. Where does this end, and is it really the sign of a healthy market, rally or not?