The SEC Exercises Some Logic (Hopefully)

by: Todd Sullivan

The SEC may force investors to disclose short positions and may take additional steps to rein in rapid-fire short sales, Chairman Christopher Cox said. The SEC is examining whether to require short sellers to reveal "substantial" stakes, just as investors must disclose significant positions in companies. The agency may also reinstate a version of the so-called uptick rule, which barred short sales of stocks when prices are falling, he said Thursday in testimony to the House Financial Services Committee.

The regulator is trying to strike a balance between installing a "circuit breaker, or something that keeps things from running away," and providing trading liquidity, Cox told the House panel.

Now, I have stumped here many times that disclosure for some should mean disclosure for all. If you are long or short you ought to be required to disclose it.

When asked, Whitney Tilson said, "Many short-sellers will object to disclosure because there is such a stigma associated with short selling,". I partially agree and at the same time disagree with Whitney. I agree short sellers will balk at the rule but I also think part of the "stigma" associated with short selling is because it is often done in the shadows, since no disclosure it necessary. Anything that is viewed being done in secret, is always going to be viewed skeptically.

Admittedly, Tilson, Ackman and Einhorn do not fall into this camp as they are upfront and honest with the investor community about their actions. Thus they tend to be viewed (at least by those other than their targets) as "short investors" rather than traders that "pile on" falling stocks. It does make a tremendous difference.

When the above mentioned three short something, it is because they view a fundamental flaw in the business, not because they think "banks stock will fall". They are almost betting on the extinction of the company like Ackman and Tilson in MBIA (NYSE:MBI) and Ambac (ABK) (although both have reduced short positions in those) and Einhorn in Lehman (LEH).

Far from a "we can make 20% here", it is a "this thing ought to go to zero".

The SEC is right to require disclosure, the more open everything is, the better. I think the more open it is, the less short sellers would be viewed as though they are "boogymen".