The SEC's Campaign Against Short Sellers

by: Daniel Miller

Chairman Christopher Cox of the Security and Exchange Commission announced yesterday that the SEC will propose new rules which would be focused on restricting naked short selling and market manipulation. 

Chairman Cox told reporters in Washington that:

Our proposals will be designed to ensure the smooth functioning of markets and to support equally the important role of bets on the upside and the downside.

Previously, the SEC announced temporary measures to limit short selling on Freddie Mac (FRE), Fannie Mae (NYSE:FMN), and 19 brokerage firms which expired one week ago yesterday on August 12.  During the four week period when the emergency ban was in place, the 19 financials gained 26%.  Since the temporary rules have expired the S&P 500 Financial Sector Index is down 10.8% and is down nearly 50% from its high in February of 2007. 

Chairman Cox stated that the SEC was examining the effects of requiring traders to actually arrange to borrow stock shares before selling them short.  The SEC is expected to announce new rules which will be aimed at curtailing naked short selling in all companies, not just the previously affected 19 companies. 

Disclosure: none